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Annual report / Arizona Power Authority.

THE ENERGY OF FORESIGHT
ARIZONA POWER 44TH ANNUAL
AUTHORITY R E P O R T
TABLE OF CONTENTS
LETTER TO THE GOVERNOR REPORT OF THE EXECUTIVE DIRECTOR REPORT OF THE COMMISSION NEW FACES FOR THE FUTURE MODELING IMPROVED PERFORMANCE WATER YEAR 2002 ENVIRONMENTAL ISSUES SCHEDULE OF CAPACITY AND ENERGY SALES HISTORICAL ENERGY SALES FINANCIALS 2002 REPORT OF INDEPENDENT ACCOUNTANTS MANAGEMENT'S DISCUSSION AND ANALYSIS
(REQUIRED SUPPLEMENTARY INFORMATION)
1 2 4 6 7 8 9 10 11 12 13 14
FINANCIAL STATEMENTS DEBT SERVICE COVERAGE RATIO
20 36
LETTER TO THE GOVERNOR
1
December 1, 2002 The Honorable Jane D. Hull Governor of Arizona State Capitol Ninth Floor, West Wing Phoenix, Arizona 85007 Dear Governor: This 44th Annual Report of the Arizona Power Authority details the Authority's operational and financial activities for the fiscal year ending June 30, 2002. This Annual Report also features the steps the Authority has taken to become a forward-looking power participant in the Southwest, as the industry shifts to an open, competitive marketplace. Through its active role in Hoover Dam's engineering and operating functions, the Authority provides reliable energy to its customers at one of the lowest rates in the nation. In addition, the Authority is helping to define the role of public power within Arizona's new deregulated electric utility environment. As the Authority assesses the future of open competition in power generation and distribution, it remains focused on its original mandate--to provide "the greatest public service and to encourage the widest practical use of electrical energy." Sincerely,
Jewell M. Lewis Chairman
2
REPORT OF THE EXECUTIVE DIRECTOR
L O O K I N G FORWARD TO ON-GOING EXCELLENCE
JOE MULHOLLAND
Like the energy sector as a whole, the Arizona Power Authority is facing a period of unprecedented change. Challenges as well as opportunities are rapidly emerging as the industry continues to spiral toward deregulation. It's difficult to predict the actual impact deregulation will have on the Authority, but we know the new conditions will require new policies. While we are proud of our past accomplishments, the Authority is now looking ahead to new ways of ensuring our customers' access to reliable, affordable power. Undoubtedly our strongest resource in preparing for the changes to come is our people. The Authority has recently augmented its team with additional aggressive, forward thinking staff members. Collectively, we now possess expertise covering the entire spectrum of the power business. This includes wholesale and retail marketing, as well as generation, transmission, distribution and ancillary services. The Authority is also well positioned to influence future energy policy. For the first time, the Authority has a seat on the board of directors of the Western Electricity Coordinating Council (WECC), which defines policy for the western United States. One of only three directors' seats to the entire state of Arizona, this places the Authority at the forefront of new planning, trends and technologies.
The Authority is also chairing the High Voltage subcommittee of the Central Arizona Transmission Study Group (CATS). CATS is a peer review group that advises the industry on building transmission in the central part of the state. The Authority's position will help ensure transmission for rural areas located between super high voltage lines and distribution facilities. With an eye to the future, we're maintaining our strong financial footing today. In addition, the Arizona Power Authority is investigating opportunities for greater interaction with power providers in Mexico and the Arizona-Mexico commission. The Authority is also exploring options in renewable energy sources through potential strategic partnerships. We've delivered a 37% rate reduction to our customers and are committed to continued outstanding service. Becoming a major planning entity and participant in power development in the Southwest will help ensure the Authority fulfills its mandate into the future.
ANNUAL REPORT 2002
4
REPORT OF THE COMMISSION
The Arizona Power Authority is advancing the role of public power in Arizona in the new era of deregulation. The Authority is also moving forward to assure an adequate supply of electric transmission capability for its customers and the state. To this end, the Authority is an active participant in the Western Electric Coordinating Council and the Central Arizona Transmission Study Group. The Authority has also retained three new staff members with over 90 years of combined experience in the power industry in the western United States. Through the concerted effort of the Commissioners and staff, the Authority was able to lower its rates by 37%. The Commissioners played an important part in supporting staff to negotiate a new Scheduling Entity Agreement, which provides for efficient use of Arizona's hydroelectric power. The Authority recognizes that transmission is fundamental to the success of open competition in the industry and is a consistent advocate for adequate and reliable service. The Authority's Commissioners and staff continue to work closely with the Bureau of Reclamation and the Western Area Power Administration to maintain the Hoover Dam and associate power system as a valuable resource to the State of Arizona. The Authority will also keep working to protect the environment and endangered species to preserve the Colorado River as a water and power resource.
JEWELL M. LEWIS
MICHAEL C. FRANCIS
Jewell Lewis was originally appointed to the Commission in 1986 and is now serving as Chair. Her present term expires in 2004. Dr. Lewis is also a member of the Arizona Prenatal Board of Trustees, the NAU Center for Excellence in Education Advisory Board and the Governor's Advisory Committee on Quality Education. Last year Dr. Lewis was named Valley Leadership Woman of the Year. Dr. Lewis has often been recognized for her leadership in business as well as her generous charitable work on behalf of medicine, education and the arts.
Michael Francis began his tenure on the Commission in 1999, and his current term extends until 2008. Mr. Francis is now serving as the Commission's Vice Chair. He is also a partner in Santa Lucia Farms, which produces more than 3.7 million garden rose bushes annually. In addition to farming, Francis owns and operates Francis Insurance Agency, which writes insurance for Arizona and California farmers. A member of the American Rose Society, Mr. Francis currently serves on the Agricultural Employment Relations Board for the State of Arizona and is a member of the M&I Thunderbird Bank Board of Directors Arizona Region.
5
LIEUTENANT GENERAL
JOHN I. HUDSON
US MARINE CORPS (RETIRED)
RICHARD S. WALDEN
DALTON H. COLE
John Hudson is Chairman of the Greater Yuma Port Authority and is a founding Director of the Foothills Bank in Yuma. General Hudson was first appointed to the Arizona Power Authority Commission in March 2000, and his current term runs to 2006. General Hudson served in the U.S. Marine Corps for 37 years. He was a founding member of the Foothills Optimist Club of Yuma, a member of the Yuma Rotary Club and past president of Yuma's 78-CRIME Board of Directors.
Richard (Dick) Walden was appointed to the Commission in 1984 and has been re-appointed through his present term expiring in 2004. Mr. Walden is also a commissioner to the Arizona Water Banking Authority, and a member of the Advisory Council on Small Business and Agriculture of the Federal Reserve Bank of San Francisco. Dick Walden is also President and CEO of Farmers Investment Company, a family-owned pecan growing and processing company headquartered in Sahuarita, Arizona.
Dalton Cole was appointed to the Commission in January 2002, for a term that expires in 2008. A retired businessman and farmer, Mr. Cole served as a member of the Central Arizona Water Conservation District. He also co-founded and chaired the HoHoKam Irrigation District and is a past chairman of the State Board of Directors for Community Colleges. Mr. Cole has also served on the Ground Water Management Committee for Pinal County and on committees to advise the Arizona Legislature regarding water matters throughout the state.
6
NEW FACES FOR THE FUTURE
In keeping with its focus on fresh developments and emerging issues, the Arizona Power Authority has hired three new staff members this year. Collectively, they bring over 90 years of combined experience in the power industry. Wise with experience, they are forward looking in attitude and charged with enthusiasm.
STEVE MENDOZA, P.E.
Steve Mendoza is the APA's Chief Engineer. With 37 years of utility industry experience, including planning, design, construction, operations and customer service, Steve brings extensive engineering management acumen as well as hands-on understanding. In addition, Steve is a member of the highly influential Board of Directors of the Western Electricity Coordinating Council, giving the Authority a significant voice in Western States power reliability and policy development. Mr. Mendoza is a Professional Engineer in Arizona, California and New Mexico.
HARVEY W. BOYCE
Harvey W. Boyce is Director of Finance and Rates. Harvey joins the Arizona Power Authority after thirty-four years with the Department of the Interior's Bureau of Reclamation and National Park Service, the Department of Energy's Western Area Power Administration and the United States Navy. Mr. Boyce also spent over three years as a power operations specialist with Nevada's Colorado River Commission. He has worked in various aspects of state and federal accounting, contract administration, and marketing and is recognized as an expert in federal power repayment studies, development and implementation.
AUDREY COLLETTI
Audrey Colletti is the Power and Computer Operations Manager. Audrey has over two decades of professional experience including such areas as process analysis, office organization and automation, presentation preparation and customer service. In addition, Audrey brings an excellent understanding of network administration, computer programming and hardware installation. Her technical expertise also covers database programming, system administration and end user training and support.
MODELING IMPROVED PERFORMANCE
Technology plays a central role in enabling the Arizona Power Authority to plan for the future. This year the Authority staff received extensive training in electric power software that enables them to model power transmission throughout the entire western U.S., as well as focusing on local areas such as particular regions of Arizona. The Authority uses its modeling software to study anticipated conditions on the power system and determine how specific changes impact the overall system. By more clearly understanding the power we're purchasing, we can provide better service to our customers. In addition, as customer contracts come up for renewal, the Authority can model planned distribution to choose the most appropriate and efficient path. In addition, this software also makes it easier to illustrate the power system to our customers. Simple to understand graphics provide a clear representation of the power system. As a result, our customers can better understand the power they receive and the factors that influence it.
7
8
WATER YEAR 2002
O P E R AT I O N S SUMMARY AND RESERVOIR STATUS
Drier than average conditions have prevailed for the past three years in the Colorado River basin. As a result precipitation has decreased from 87% of normal in September 2001 to 58% in September 2002. The Colorado Basin snowpack measured 74% of normal in January 2002. Total unregulated inflow into Lake Powell dropped from an already low 59% in 2001 to 25% in 2002, making it the driest year on record. In September 2002, the elevation of Lake Powell was 3,627 feet, a decrease of 38 feet for the year and 73 feet below full pool elevation. The National Weather Service continues to forecast drier than normal conditions. The 25% inflow level in 2002 resulted in only 3.66 million acre-feet, the lowest unregulated inflow recorded since Glen Canyon Dam was completed in 1963. Subsequently, 2002 water storage for Lake Powell dropped to 14.5 million acre-feet, or 59% of capacity. By September 2002, the elevation of Lake Mead dropped to 1,156 feet, which is 73 feet below full pool elevation. Storage in Lake Mead dropped to 17.1 million acre-feet, or 66% of capacity. Because of the drawn down condition of Lake Powell, releases from that lake in water year 2003 are scheduled to meet the minimum objective release of 8.23 million acre-feet. This is consistent with requirements of the 1970 Criteria for Coordinated Long-Range Operation of Colorado River Reservoirs. Hydrologic conditions often change and the actual operation and condition of the Colorado River Storage System will depend on downstream requirements and the weather conditions in the Colorado River basins during the 2002-2003 water year.
Lake Powell 3,700 Feet At Full Capacity
RESERVOIR STATUS SEPTEMBER 2002
Lake Mead 1,229 Feet At Full Capacity 3,627 Feet
1,156 Feet
ENVIRONMENTAL ISSUES
The Bureau of Reclamation has issued its 2003 Water Year Annual Operating Plan for the Colorado River. The Plan reflects the assumed effects of the California water right holders executing a settlement agreement that would allow Reclamation to continue to declare a quantified surplus of water under its Interim Surplus Criteria Guidelines. This will allow California to take up to fifteen years (from 2002) to reduce its use of Colorado River water to its legal limit. Activities such as water diversions and power production on the Lower Colorado River continue to be monitored for their impact on endangered and threatened species under the Multi-Species Conservation Program (MSCP). The MSCP will be implemented over a 50-year period, and will address future federal agency consultation needs under Section 7 and the incidental take authorizations under Section 10 of the Endangered Species Act. In lieu of funds from the Arizona Legislature, Arizona's share of costs for the MSCP process was covered by contributions from Arizona water and power interests. A lawsuit brought by Defenders of Wildlife against Reclamation remains in litigation. The suit alleges violation of the Endangered Species Act in failing to evaluate and compensate for the impacts of Colorado River operations on listed species in the Mexican delta. If Defenders prevail, Reclamation may be required to take actions that will be costly to the water and power users in the Lower Colorado River Basin.
9
10
SCHEDULE OF CAPACITY AND ENERGY SALES
FOR PERIOD OF JULY 1, 2001 THROUGH JUNE 30, 2002 AVERAGE BILLING DEMAND (KW) 5,330 534 2,525 136,945 788 5,457 0 16,484 13,474 16,483 12,516 297 6,788 8,897 20,508 2,110 7,491 7,704 2,026 1,500 2,729 5,730 32,871 442 602 1,313 2,467 882 1,763 889 1,941 0 0 0 0 0 0 0 0 319,486 194,381 0 ENERGY DELIVERED (KWH) 10,288,000 1,722,000 8,185,000 385,469,000 3,744,000 16,500,000 0 93,064,000 61,017,000 62,076,000 33,438,000 866,000 16,244,000 14,677,000 59,250,000 10,098,000 17,652,000 15,757,000 10,664,000 957,000 13,186,000 34,731,000 171,347,000 4,118,000 4,869,000 5,578,000 9,628,000 2,453,000 11,768,000 5,442,000 12,920,000 0 0 0 0 0 0 0 0 1,097,708,000 $ $ $ MILLS PER KWH 17.75 16.34 17.36 15.35 12.60 12.89 0.00 14.06 14.48 13.90 13.93 11.15 13.66 18.89 16.98 17.55 17.99 17.24 12.65 10.51 16.76 11.37 14.58 12.28 12.89 16.95 14.63 15.23 13.69 13.56 12.53 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 14.92
SALE OF HYDRO POWER Customers
Aguila Irrigation District Avra Valley Irrigation & Drainage District Buckeye Water Conservation District Central Arizona Water Conservation District Chandler Heights Citrus Irrigation District Cortaro-Marana Irrigation District Electrical District No. 1, Pinal Electrical District No. 2, Pinal Electrical District No. 3, Pinal Electrical District No. 4, Pinal Electrical District No. 5, Pinal Electrical District No. 5, Maricopa Electrical District No. 6, Pinal Electrical District No. 7, Maricopa Electrical District No. 8, Maricopa Harquahala Valley Power District Maricopa County Municipal Water District #1 McMullen Valley Water Conservation & Drainage District Ocotillo Water Conservation District Queen Creek Irrigation District Roosevelt Irrigation District Roosevelt Water Conservation District Salt River Project San Tan Irrigation District Silverbell Irrigation & Drainage District Tonopah Irrigation District Wellton-Mohawk Irrigation & Drainage District City of Page City of Safford Town of Thatcher Town of Wickenburg Ak-Chin Indian Community Arizona Electric Power Cooperative Arizona Public Service Co. Citizens Utilities Co. City of Mesa Tohono O'odham Utilities Authority San Carlos Project Tucson Electric Power Co. TOTAL HYDRO POWER SALES TOTAL SUPPLEMENTAL POWER SALES OTHER ELECTRIC SALES TOTAL SALES
*Difference between Total Electric Sales and Operating Revenue is due to post-closing reconcilliation of estimate to actual deliveries between the Authority and Western Area Power Administration
SALES ($) 182,646 28,137 142,112 5,917,303 47,178 212,620 0 1,308,722 883,283 863,148 465,632 9,654 221,919 277,222 1,006,239 177,258 317,483 271,697 134,893 10,054 221,022 394,855 2,498,801 50,554 62,767 94,562 140,874 37,369 161,118 73,777 161,952 0 0 0 0 0 0 0 0 16,374,851 661,409 33,947
$17,070,206.77 *
HISTORICAL ENERGY SALES
11
The following graph illustrates the Authority's historical energy sales (GWh) since 1994 for power obtained from the Hoover Powerplant and for supplemental sales.
Supplemental power is obtained by the Authority for sale to customers on an "as requested" basis. This energy augments the customers' allocation from the Authority.
FISCAL YEAR
HOOVER SUPPLEMENTAL TOTAL
1994
734 25 759
1995
773 65 838
1996
792 224 1,016
1997
1,485 79 1,564
1998
1,389 3 1,392
1999
1,318 2 1,320
2000
1,205 4 1,209
2001
1,103 0 1,103
2002
1,098 0 1,098
GWh
1500 1400 1300 1200 1100 1000 900 800 700 600 500 400 300 200 100 0
HOOVER ENERGY SALES
SUPPLEMENTAL ENERGY SALES
1994
1995
1996
1997
1998
1999
2000
2001
2002
12
FINANCIALS 2002
F I N A N C I A L TABLE OF CONTENTS
REPORT OF INDEPENDENT ACCOUNTANTS MANAGEMENT'S DISCUSSION AND ANALYSIS
(REQUIRED SUPPLEMENTARY INFORMATION)
13 14
FINANCIAL STATEMENTS STATEMENT OF NET ASSETS: STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS STATEMENT OF CASH FLOWS NOTES TO FINANCIAL STATEMENTS SUPPLEMENTAL SCHEDULE: STATEMENT OF OPERATIONS OF THE HOOVER UPRATING FUND STATEMENT OF INCOME (LOSS) OF THE HOOVER UPRATING FUND DEBT SERVICE COVERAGE RATIO
20 20
21 22 24
32
34 36
REPORT OF INDEPENDENT ACCOUNTANTS
13
To the Arizona Power Authority Commission In our opinion, the accompanying statement of net assets and the related statement of revenues, expenses, and changes in net assets, and statement of cash flows present fairly, in all material respects, the financial position of the Arizona Power Authority (A Body, Corporate and Politic, of the State of Arizona) at June 30, 2002, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As described in Note 1, the Authority adopted the provisions of the Governmental Accounting Standards Board ("GASB") Statement No. 34, Basic Financial Statements - and Management's Discussion and Analysis - for State and Local Governments, as amended by GASB Statement No. 37, Basic Financial Statements and Management's Discussion and Analysis - for State and Local Governments: Omnibus - an Amendment of GASB Statements No. 21 and No. 34 and GASB Statement No. 38, Certain Financial Statement Note Disclosures, as of July 1, 2001. The management's discussion and analysis is not a required part of the financial statements but is supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the supplementary information. However, we did not audit the information and express no opinion on it. The supplemental schedules on pages 34 through 37 are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects when considered in relation to the basic financial statements taken as a whole.
Pricewaterhouse Cooper L.L.P. August 2, 2002 Phoenix, Arizona
14
MANAGE ME NT'S DISCUSSION AND ANALYSIS
The following is a discussion and analysis of the Arizona Power Authority's (the "Authority") financial performance for the fiscal year ended June 30, 2002 and is designed to (a) assist the reader in focusing on significant financial issues, (b) provide an overview of the Authority's financial activity, (c) identify changes in the Authority's financial position. Since the Management's Discussion and Analysis ("MD&A") is designed to focus on the current year's activities, resulting changes and currently known facts, please read it in conjunction with the Authority's financial statements beginning on page 22.
HIGHLIGHTS
FINANCIAL HIGHLIGHTS The Authority's net assets decreased by $400,516 or 11%. The Authority's revenue increased by $2,284,061 or 11% and the net results from operations reduced the operating loss by $343,685 or 46% producing a decrease in net assets of $400,516. AUTHORITY HIGHLIGHTS Revised Scheduling Entity Agreement - On June 1, 1987, the Authority and the Salt River Project entered into a Scheduling Entity Agreement that provided for the Salt River Project to be the entity that dynamically schedules the Hoover generation allocated to the Authority by the Western Area Power Administration. The Agreement had been amended twice through September 30, 2001. The Authority and the Salt River Project executed a third Amendment to the Scheduling Entity Agreement effective October 1, 2001. This Amendment provides for the Salt River Project to pay the Authority $8.4 million each year in return for allowing the Salt River Project to continue to be the Scheduling Entity of the Hoover generation in Arizona through September 30, 2004. The amount of revenue paid by the Salt River Project for the year ending June 30, 2002 covered only nine months; consequently, the contribution to revenue pursuant to the Scheduling Entity Agreement was $6.3 million, not $8.4 million. Negotiations are currently under way to extend the Scheduling Entity Agreement and the $8.4 million annual payment by the Salt River Project for at least an additional two years. Other Changes That Will Improve or Provide Future Benefit to the Arizona Power Authority No new agreements or new customers were added during the current period. However, the Authority added three new staff members in recent months that bring substantial experience and knowledge regarding the operations of power systems in the southwest.
15
USING THIS ANNUAL REPORT
This annual report consists of a series of financial statements. The Statement of Net Assets, the Statement of Net Assets, Revenues, Expenses and Changes in Net Assets and the Statement of Cash Flows (on pages 20-23) provide information about the activities of the Authority as a whole and present a longer-term view of the Authority's finances. The Authority is a body corporate and politic of the State of Arizona and is a special-purpose government engaged only in business-type activities. Accordingly, the financial statements presented in this Annual Report are the required basic financial statements in accordance with the provisions of Governmental Accounting Standards Board Statement No. 34, Basic Financial Statements and Management's Discussion and Analysis for State and Local Governments. There are six basic or normal transactions that will affect the comparability of the Statement of Net Assets summary presentation: Net Results of Activities which will impact (increase/decrease) current assets and undesignated net assets. Borrowing for Capital which will increase assets and long-term debt. Spending Borrowed Proceeds on New Capital which will reduce current assets and increase capital assets. There is a second impact, an increase in invested capital assets and an increase in related net debt which will not change the investment in capital assets, net of debt. Spending of Non-borrowed Current Assets on New Capital which will (a) reduce current assets and increase capital assets and (b) will reduce undesignated net assets and increase investment in capital assets, net of debt. Principal Payment on Debt which will reduce current assets and reduce long-term debt. Reduction of Capital Assets through Depreciation which will reduce capital assets and investment capital assets, net of debt.
OVERVIEW OF THE FINANCIAL STATEMENTS
This Discussion and Analysis is an introduction to the Authority's basic financial statements, which are comprised of two components: (1) Fund Financial Statements. (2) Notes to the Financial Statements. Fund Financial Statements (Reporting on all of the Authority's Funds.) The Fund Financial Statements begin on page 20 and provide detailed information about the individual funds. A fund is a fiscal and accounting entity with a self-balancing set of accounts that the Authority uses to keep track of specific sources of revenues and disbursements for specific purposes. The Authority's funds are treated as proprietary and are enterprise in nature. Most of the Authority's financial dealings are with contracts outside of state government. A separate fund is not maintained for government activities. The Authority does not act as a fiduciary.
16
CONDENSED STATEMENT OF NET ASSETS BUSINESS TYPE ACTIVITIES
(THOUSANDS OF DOLLARS) JUNE 30, 2002 Current assets Long-term assets Capital assets 13,102,938 51,832,754 181,499 65,117,191 Current liabilities Long-term (Bonds pay, net) Net Assets: Capital Assets Unrestricted Net Assets, End of Year 181,499 2,942,661 3,124,160 190,987 3,333,689 3,524,676 -9,488 -391,028 -400,516 -5% -12% -11% 5,476,945 56,516,086 61,993,031 JUNE 30, 2001 14,673,921 52,948,182 190,987 67,813,090 4,622,973 59,665,441 64,288,414 DIFF $ -1,570,983 -1,115,428 -9,488 -2,695,899 853,972 -3,149,355 -2,295,383 DIFF % -11% -2% -5% -4% 18% -5% -4%
The largest component of the Authority's net assets is unrestricted reserves (property replacement, designated and undesignated). CONDENSED STATEMENT OF NET ASSETS DISCUSSION Current Assets changed because the Authority's customers accounts receivable decreased due to having less power available for sale, interest receivable on investments decreased due to much lower interest rates and prepaid purchased power (banked power) decreased due to having less power available for banking. Long Term Assets (Advances for the Hoover Uprating Program) changed because of the reduction in the cost of the current year Uprating Program and more of the prior year charges being amortized. Current Liabilities changed primarily due to the establishment of a bonds payable accrual, a decreased power contracts payable and the elimination of the Authority's customer credits accrual. Long Term Liabilities changed because of a decrease in bonds payable due to reclassification to a current liability, a decrease in the discount on bonds payable due to amortization and an increase in the investments held by Trustee due to an accrual for the payment of bond principal. Net Assets changed because of decreases in capital assets, property replacement and undesignated assets.
17 There are six basic or normal transactions that will affect the comparability of the Statement of Changes in Net Assets summary presentation. REVENUES: Economic Condition which can reflect a declining, stable or growing economic environment and has a substantial impact on rates and volumes of consumption. Increase/Decrease in Commission Approved Rates while certain aspects of rates are set by statute, the Authority has the ability to impose and periodically increase/decrease rates. Market Impacts on Investment Income market conditions may cause investment income to fluctuate more in the long-term than alternative shorter-term options. EXPENSES: Introduction of New Programs individual programs may be added or deleted to meet changing Authority needs. Increase/Decrease in Authorized Personnel changes in service demand may cause the Authority to increase/decrease authorized staffing. Staffing costs (salary and related benefits) represent 2.5% of the Authority's operating costs. Salary Increases (cost of living, merit and market adjustment) the ability to attract and retain human and intellectual resources requires the Authority to strive to approach a competitive salary range position in the marketplace.
18
CHANGES IN NET ASSETS BUSINESS TYPE ACTIVITIES
(THOUSANDS OF DOLLARS) JUNE 30, 2002 Revenues: Operating Revenues Expenses: Operating Expenses Purchase Power Western Credits Amortization of Hoover Uprating Program Costs Trans & Dist Administrative and general Depreciation Other Total Operating Expenses Operating Income (loss) Other (deductions) income: Interest Expense Deferred Interest Expense Interest Income Other Net Total Other Income (loss) Change in Net Assets Net Assets, Beginning of Year Net Assets, End of Year -3,729,166 2,977,031 746,533 2,323 -3,279 -400,516 3,524,676 $ 3,124,160 -3,729,166 2,727,681 1,207,760 18,030 224,305 -516,617 4,041,293 $ 3,524,676 0 249,350 -461,227 -15,707 -227,584 116,101 -516,617 $ -400,516 0% 9% -38% -87% -101% -22% -13% -11% 16,075,797 -4,623,123 15,077,567 -2,955,153 998,230 -1,667,970 7% 56% $ 23,018,463 $ 20,734,402 $ 2,284,061 11% JUNE 30, 2001 DIFF $ DIFF %
4,623,123 5,205,863 1,215,200 28,855 889,985 23,415,700 -397,237
2,955,153 5,215,104 1,028,848 37,473 116,332 21,475,324 -740,922
1,667,970 -9,241 186,352 -8,618 773,653 1,940,376 343,685
56% 0% 18% -23% 665% 9% -46%
CHANGES IN NET ASSETS DISCUSSION Operating revenues changed because of increased power sales. Operating expenses changed because of increased purchased power costs; Western credits were increased because of the accrual of bonds payable principal and other costs related to the Uprating Program; amortization of Uprating Program costs increased because of the additional credits received; Administrative and general increased because of the hiring of additional employees and increased legal costs; depreciation decreased because less existing capital assets were available to depreciate and few new capital assets were purchased; and other costs increased because of the expensing of certain deferred assets. Operating loss changed due to a decrease in the loss compared to the prior year. Other items effecting a change in "Net Assets" were an increase in deferred interest expense because of less interest income and decreased late charges received from customers.
19
CAPITAL ASSETS
As of fiscal year end, the Authority had $181,499 invested in a variety of capital assets, as reflected in the following schedule, which represents a net decrease (additions less retirements and depreciation) of $9,488 or 5% from the end of last year. JUNE 30, 2002 Distribution Plant General Plant - Office $ 40,341 141,158 $ 181,499 JUNE 30, 2001 $ 49,038 141,949 $ 190,987
The following reconciliation summarizes the change in Capital Assets, which is presented in detail on page 28 of the Notes to the Financial Statements JUNE 30, 2002 Beginning Balance Additions Depreciation Ending Balance $ 190,987 19,367 (28,855) $ 181,499
DEBT OUTSTANDING
As of fiscal year-end, the Authority had $68,945,000 in debt outstanding, no change compared to last year. Also see page 28 of the Notes to the Financial Statements for a detailed summary of debt activity during the year.
BUSINESS TYPE ACTIVITIES
The following chart depicts the sources of revenues for the fiscal year: The Authority's revenues may decrease in the coming year(s) due to drought conditions. Insufficient rain and snow pack results in less water to be processed through the turbines at Hoover Dam thereby producing less hydroelectric power available for sale. Additional wet years, and other factors, could help stabilize revenues.
Hoover Power Sales $22,256,521 (93.64%) Other Income $2,323 (0.01%) Interest Income $746,533 (3.14%) Supplemental Power Sales $761,942 (3.21%)
The following chart depicts the types of expenses for the fiscal year:
Hoover Power Purchased $15,344,365 (63.49%) Supplemental Power Purchased $731,432 (3.03%)
For further information and/or questions on this report, please call the Power Authority Office at 602-542-4263.
Depreciation $28,855 (0.12%) Administrative & General $1,215,200 (5.03%)
Interest Expense $752,135 (3.11%) Other Cost $889,985 (3.68%)
Transmission & Distribution $5,205,863 (21.54%)
20
FINANCIAL STATEMENTS
STATEMENT OF NET ASSETS
JUNE 30, 2002
APA GENERAL FUND
HOOVER UPRATING FUND
TOTAL
ASSETS Current assets: Cash and cash equivalents Cash with fiscal agent Accounts receivable, customers power purchases Interest receivable Prepaid purchased power and other Total current assets Property, plant and equipment, net (Note 3) Advances for Hoover Uprating Program, net
(Notes 2 &5)
$
4,329,510 215,369 17,768 4,562,647 181,499 -
$
2,532,576 2,694,576 1,648,972 134,857 1 , 529,310 8,540,291 51,832,754
$
6,862,086 2,694,576 1,864,341 152,625 1,529,310 13,102,938 181,499 51,832,754
Total assets LIABILITIES Current liabilities: Accounts payable and other Power contracts payable Accrued interest payable Bonds payable Total current liabilities Bonds payable (Note 6) Discounts on bonds payable Less investments held by trustee, including unamortized net discount on investments of $3,566 (Note 7) Bonds payable, net Total liabilities NET ASSETS Net assets: Invested in capital assets Unrestricted: Property placement Designated Undesignated Total net assets
$
4,744,146
$
60,373,045
$
65,117,191
$
7,688 212,743 220,431 -
$
86,653 2,808,280 911,581 1 , 450,000 5,256,514 67,495,000 (1,263,341)
$
94,341 3,021,023 911,581 1,450,000 5,476,945 67,495,000 (1,263,341)
$ 220,431 $
(9,715,573) 56,516,086 61,772,600 $
(9,715,573) 56,516,086 61,993,031
$
181,499 1,030,150 4,000,000 (687,934)
$
(1,399,555)
$
181,499 1,030,150 4 ,000,000 (2,087,489)
$
4,523,715
$
(1,399,555)
$
3,124,160
The accompanying notes are an integral part of these financial statements.
21
STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS
JUNE 30, 2002
APA GENERAL FUND $ 761,942
HOOVER UPRATING FUND $ 22,256,521 $
TOTAL 23,018,463
OPERATING REVENUES Operating expenses: Purchased power Western credits (Note 5) Amortization of Hoover Uprating Project costs Transmission and distribution Administrative and general Depreciation Other Total operating expenses Operating income (loss) Other (deductions) income: Interest expense (Note 6) Deferred interest expense (Note 5) Interest income Other, net Total other income (loss) Increase (decrease) in net assets Net assets, beginning of the year Net assets, end of the year
731,432 1,715 116,602 28,855 871,843 1,750,447 (988,505)
15,344,365 (4,623,123) 4,623,123 5,204,148 1,098,598 18,142 21,665,253 591,268
16,075,797 (4,623,123) 4,623,123 5,205,863 1,215,200 28,855 889,985 23,415,700 (397,237)
114,455 114,455 (874,050) 5,397,765 $ 4,523,715 $
(3,729,166) 2 ,977,031 632,078 2,323 (117,734) 473,534 (1,873,089) (1,399,555) $
(3,729,166) 2, 9 7 7 , 0 3 1 746,533 2,323 (3,279) (400,516) 3,524,676 3,124,160
The accompanying notes are an integral part of these financial statements.
22
STATE ME NT OF CASH FLOWS
JUNE 30, 2002
APA GENERAL FUND
HOOVER UPRATING FUND
TOTAL
Cash flows from operating activities: Cash received from customers Cash payments to suppliers for goods or services Cash payments to employees for services
Net cash (used in) provided by operating activities
$
548,602 (884,184) (335,582)
$
22,928,051 (21,366,600) (521,521) 1,039,930
$
23,476,653 (22,250,784) (521,521) 704,348
Cash flows from capital and related financing activities: Interest payments on obligations Acquisition of capital assets Change in advances for Hoover Uprating Program
Net cash (used in) provided by capital and related financing activities Cash flows from investing activities: Interest on investments Purchase of investment securities Proceeds from sale and maturities of investment securities Net cash (used in) provided by investing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year
The accompanying notes are an integral part of these financial statements.
(19,367) -
(3,646,323) 4,094,782
(3,646,323) (19,367) 4,094,782
(19,367)
448,459
429,092
132,970 132,970 (221,979) 4,551,489 $ 4,329,510 $
669,860 (10,176,793) 8,394,596 (1,112,337) 376,052 4,851,100 5,227,152 $
802,830 (10,176,793) 8,394,596 (979,367) 154,073 9,402,589 9,556,662
(Continued)
23
JUNE 30, 2002
APA GENERAL FUND
HOOVER UPRATING FUND
TOTAL
Reconciliation of operating loss to net cash provided by (used in) operating activities: Operating loss Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation Changes in assets and liabilities: (Increase) decrease in accounts receivable Decrease in prepaid purchase power and other (Decrease) in accounts payable Increase (decrease) in power payable Increase in accrued annual leave Decrease in accounts payable customer credits Total adjustments Net cash (used in) provided by operating activities Supplemental schedule of non-cash capital and related financing activities: Deferred interest on obligations Supplemental schedule of cash paid for interest $ 28,855 28 , 8 5 5 $ (988,505) $ 591,268 $ (397,237)
(213,340) 624,954 (289) 212,743 652,923 (335,582) $
671,530 585,614 (15,646) (591,413) 48,577 (250,000) 448,662 1,039,930 $
458,190 1,210,568 (15,935) (378,670) 48,577 (250,000) 1,101,585 704,348
$ $
-
$ $
2,977,031 3,729,166
$ $
2,977,031 3,729,166
(Concluded)
The accompanying notes are an integral part of these financial statements.
24
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business The Arizona Power Authority (the "Authority") is a body, corporate and politic, without taxing power, established by the Arizona Legislature on May 27, 1944 by the Power Authority Act. Under the Power Authority Act, the Authority is directed to obtain electric power developed from the mainstream of the Colorado River and sell such power to certain qualified purchasers. The Power Authority Act provides that the Authority must be a self-supporting agency and prohibits the Authority from incurring any obligation, which would be binding upon the State of Arizona. The Authority supplies capacity and energy on a wholesale basis to certain power purchasers in the State of Arizona. The Authority's primary source of power and energy is the Hoover Power plant at Hoover Dam, located approximately 25 miles from Las Vegas, Nevada. Hoover power is produced by the Boulder Canyon Project hydropower plant owned by the Bureau of Reclamation. Hoover Dam is the highest and third largest concrete dam in the United States of America. Hoover Dam was dedicated in 1935 and the first generator of the Hoover Power plant was in full operation in October 1936 and has been in continuous operation since. Power and energy from the Hoover Power plant is transmitted to load centers in Arizona, California and Nevada. The Authority first contracted for Arizona's share of Hoover power in 1952 and has continuously provided power and energy to its customers since that time. The Authority is governed by a commission of five members appointed by the Governor and approved by the Senate. The term of office for each member is six years and the members select a chairman and vice-chairman from among its membership for two-year terms. Pursuant to Arizona law, the ("Commission") serves as the Authority's regulatory body with the exclusive authority to establish electric prices. The Authority is required to follow certain procedures, pertaining to public notice requirements and special meetings, before implementing changes in electric price schedules. Change in Accounting Policy Effective July 1, 2001, the Authority adopted Governmental Accounting Standards Board ("GASB") Statement No. 34, Basic Financial Statements - and Management's Discussion and Analysis - for State and Local Governments, as amended by GASB Statement No. 37, Basic Financial Statements and Management's Discussion and Analysis - for State and Local Governments: Omnibus - an Amendment of GASB Statements No. 21 and No. 34 and GASB Statement No. 38, Certain Financial Statement Note Disclosures. These statements established a new financial reporting model for state and local governments consisting of both the government-wide and fund financial statements (within the basic financial statements) and primary activities are categorized as either governmental or business type. The Authority is only engaged in business activities. In accordance with the provisions of paragraph 138 of GASB No. 34, this audit report presents the required basic financial statements for special-purpose governments engaged only in business-type activities. Accordingly, no significant change or impact resulted from the adoption of GASB No. 34, as amended by GASB No. 37 and No. 38.
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Measurement Focus The Authority's Funds are accounted for on a flow of economic resources measurement focus. All assets and liabilities (whether current or non-current) associated with their activity are included in the Statement of Net Assets. The Statement of Revenues, Expenses, and Changes in Net Assets present increases (revenues) and decreases (expenses) in total net assets. The Authority's reported total net assets are segregated into invested capital assets and unrestricted components. Basis of Accounting Basis of Accounting refers to the time at which revenues and expenses are recognized in the accounts and reported in the financial statements, regardless of the measurement focus applied. The accrual basis of accounting is used by the Authority whereby revenues are recognized in the accounting period in which they are earned and become measurable, and expenses are recognized when incurred. Basis of Presentation GASB No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting, requires that governments' proprietary activities apply all GASB pronouncements as well as the following pronouncements issued on or before November 30, 1989, unless those pronouncements conflict with or contradict GASB pronouncements, Financial Accounting Standards Board ("FASB") Statements and Interpretations, Accounting Principles Board Opinions and Accounting Research Bulletins. Governments are given the option whether or not to apply all FASB Statements and Interpretations issued after November 30, 1989, except for those that conflict with or contradict GASB pronouncements. The Authority has elected not to implement FASB Statements and Interpretations issued after November 30, 1989. Revenue Recognition The Authority recognizes revenue when power is delivered and billed to the customers. Cash and Cash Equivalents The Authority treats short-term temporary cash investments with original maturities when purchased, of three months or less as cash equivalents. Property, Plant, Equipment and Depreciation Property, plant and equipment are stated at original cost. The costs of additions and replacements are capitalized. Replacements of minor items of property are charged to expense as incurred. Costs of property retired are eliminated from accounts, likewise such costs plus removal expense less salvage are charged to accumulated depreciation. Advances for Hoover Uprating Program Proceeds from bonds payable were advanced by the Authority for uprating the Hoover Power Plant and are recorded as advances. Such advances, including debt issue costs, plus net interest expense incurred by the Authority are reimbursed in the form of credits on the monthly power bills rendered by the Western Area Power Administration of the Department of Energy ("Western"). These credits are issued over the 30-year life of the bonds. Substantially all advances, net interest expense and other related costs on the bonds are charged to the Uprating Program as amounts to be recovered from future credits.
25
26
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Investments The Authority has classified its marketable securities as held-to-maturity. Held-to-maturity securities represent those securities that the Authority has both the intent and ability to hold to maturity and are carried at amortized cost. Schedule C Energy Under its Electric Service Contract with Western, the Authority has preferential rights to excess energy ("Schedule C energy") generated at the Hoover Power Plant. The Authority buys Schedule C energy when available from Western during an operating year (October 1 to September 30). The Authority's financial statements are prepared on a fiscal year (July 1 to June 30) basis. When excess energy is available, the Authority bills its customers as Schedule C energy is delivered and receives payment during a given operating year, but Western does not bill for the cost of such Schedule C energy until the following operating year. An estimate of such amounts is accrued for at the end of the fiscal year. Operating and Non-Operating Revenues Operating revenues are revenues derived from the sale of power to customers or from other contractual agreements. Operating revenues include $6,300,000 received from Salt River Project for scheduling entity services. The revenue is the result of a recent agreement between the Authority and the Salt River Project which will yield $8,400,000 annual revenues to the Authority thereby reducing the overall revenue requirements to be paid by the Authority's customers through power rates. The agreement expires September 30, 2004 unless renewed. Non-operating revenues are from sources other than the sale of power to customers and primarily consist of income earned on investments. Application of Net Assets to Expenses Incurred The Authority applies unrestricted, undesignated net assets to expenses incurred. To the extent undesignated net assets are unavailable, unrestricted, designated net assets will be applied to expenses incurred. Customer Credits The Authority operates on a non-profit basis and reduces charges to its customers, through credits on power bills, for any revenues in excess of expenses after the close of the operating year. Likewise, the Authority bills it's customers for any deficit in revenues versus expenses incurred during the operating year. As of June 30, 2002, there were no accrued credits to be applied to customers' power bills based upon rates from Western's operating year ending September 30, 2002. Income Taxes The Authority is exempt from federal and Arizona state income taxes. Accordingly, no provision for income taxes has been recorded for the Authority in the accompanying financial statements.
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Geographic and Product Concentration The Authority's revenues are derived from the sale of electrical power and services to contracted customers in the state of Arizona. The Hoover Uprating Fund is used to purchase electric power solely from Western. The Authority's General Fund is used to purchase electric power from various providers. 2. FUND ACCOUNTING Hoover Uprating Fund The Hoover Power Plant Act of 1984 ("Hoover Act") authorized the U.S. government to increase the capacity i.e., "uprate," of existing generating equipment at the Hoover Dam Power Plant ("Uprating Program"). Instead of appropriating further federal funds for the Uprating Program, Congress implemented an advancement of funds procedure whereby prospective non-federal purchasers of the uprated Hoover capacity and associated energy contribute to the financing of the Uprating Program. The Uprating Program was determined to be complete in September 1995. The Authority financed a portion of the total Uprating Program by issuing bonds. The Hoover Uprating Fund accounts for advances by the Authority in connectio n with the Uprating Program. Effective June 1, 1987, the Authority executed new power contracts with Western and its customers which expire in 2017. The revenues and expenditures applicable to the sale and transmission of power and energy received by the Authority from Western under these contracts are accounted for in the Hoover Uprating Fund. APA General Fund The Authority's operations other than those applicable to the Hoover Uprating Fund are accounted for in the APA General Fund. The purchase of supplemental power and the sale and transmission of such power to the Authority's customers comprise the majority of this fund's activity. 3. CASH All cash balances maintained by the State of Arizona Treasurer are for pooled investment purposes. Statutes require the State Treasurer to invest these pooled funds in obligations of the U.S. government. All investments are carried at cost.
27
28
4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment of the APA General Fund at June 30, 2002 were as follows: 2002 Transmission and distribution plant General plant Total Less accumulated depreciation Property, plant and equipment, net JUNE 30, 2001 Property, plant and equipment: Transmission plant $ Distribution plant General plant - office Total property, plant and equipment Accumulated depreciation: Transmission plant Distribution plant General plant - office Total accumulated depreciation Property, plant and equipment, net $ ADDITIONS DISPOSALS
$
508,683 702,966 1,211,649 (1,030,150)
$
181,499
JUNE 30, 2002
289,049 219,634 683,599 1,192,282
$
1 9,3 67 19,367
$
-
$
289,049 21 9 , 6 3 4 70 2 , 9 6 6 1 ,211,649
(289,049) (170,596) (541,650) (1 , 0 0 1 , 2 9 5 ) 190,987 $
(8,697) (20,158) ( 28,855) (9,488) $
$
(289,049) (179,293) (561,808) (1,030,150) 181,499
The transmission and distribution plant is comprised of a substation and related equipment. Purchased power is delivered over transmission facilities owned by Western. Depreciation is provided on the straight-line composite method based on the estimated useful lives of the property items, which range from 5 to 44 years. 5. ADVANCES FOR HOOVER UPRATING PROGRAM Advances for the Hoover Uprating Program were reimbursed by Western through credits on the Authority's power bills in the amount of $4,623,123 for the year ended June 30, 2002. Credits were received for the upraters portion of principal and interest expense on the bonds and other costs associated with the Hoover Uprating Program. During the year ended June 30, 2002, principal amortization, interest expense and other related costs on the bonds issued to finance the Uprating Program exceeded interest income by $4,559,365. Any variation between credits received and costs incurred are reconciled the following year. 6. BONDS PAYABLE Bonds payable consists of the following: JUNE 30, 2001 Bond payable current $ Bond payable long-term 68,945,000 Total bonds payable $ 68,945,000 INCREASES $ $ REDUCTIONS $ $ TRANSFERS $ $ J U N E 30, 2002
1,450,000 $ 1,450,000 (1,450,000) 67,495,000 $ 68,945,000
6. BONDS PAYABLE (CONTINUED) In prior years, the Authority defeased various issues of bonds by purchasing U.S. government securities which were deposited in an irrevocable trust with an escrow agent to provide for future debt service until the call dates. As a result, those bonds are considered to be defeased and the liability for these bonds has been removed from the Hoover Uprating Fund. Accordingly, these trust account asset and related liabilities are not included in the Authority's financial statements. The remaining bonds, totaling $68,945,000, bear interest ranging from 4.9 percent to 5.4 percent, are due from 2003 through 2017, and are secured by the pledged property, as defined by the resolution, which includes the proceeds from the sale of the bonds, rights and interest in various contracts and revenues. The Authority amortizes the bond discount using the straight-line method, which approximates the effective interest method. Principal amounts due over the next five years ended June 30 and thereafter are as follow: $1,450,000 in 2003, $2,320,000 in 2004, $2,545,000 in 2005, $2,790,000 in 2006, $3,070,000 in 2007, $20,820,000 in 2008 through 2012, $29,160,000 in 2013 through 2017, and $6,790,000 in 2018. Crossover Refunding On September 12, 2001 the Authority issued $57,520,000 of Special Obligation Crossover Refunding Bonds. Proceeds from the sale of the bonds along with a fund's contribution by the Authority will be held in an escrow trust account invested in government securities until October 1, 2003 (the "Crossover Date") when, if certain conditions are met, the crossover refunding is scheduled to take place and $62,630,000 of the 1993 Series Power Resource Revenue Refunding Bonds maturing on and after October 1, 2005 will be defeased. If these conditions are not met, the assets in the escrow trust account will be used to retire the Special Obligation Crossover Bonds on the Crossover Date. The crossover is subject to the condition that on the Crossover Date balances held in the Debt Service Reserve Account at least equal the Debt Service Reserve Requirement and an appropriate legal opinion regarding the validity of the Authority's 2001 Series Power Resource Revenue Refunding Bonds has been received. The proceeds in the government securities escrow trust account, together with the income realized from investment of trust assets, serve as collateral for the Special Obligation Crossover Bonds and are paying the debt service on those bonds until the Crossover Date. The Special Obligation Crossover Bonds are payable solely from the amounts in the escrow trust account and are not payable from any other source. Because they are not payable from revenues derived by the Authority or secured by any assets held by the Authority, neither the Special Obligation Crossover Bonds nor the assets held in the escrow trust account are reflected on the Authority's statement of net assets at June 30, 2002. However, in conjunction with the issuance of the Crossover Bonds, the Authority deposited $2,694,576 with the crossover bond trustee; this amount is reflected as "Cash with fiscal agent" in the Authority's Statement of Net Assets at June 30, 2002. If the crossover occurs on the Crossover Date, the outstanding Special Obligation Crossover Bonds will be exchanged for 2001 Series Power Resource Revenue Refunding Bonds of the same principal amount, maturity date, and interest rate as the crossover bonds. The proceeds in the escrow trust account will be used to refund that portion of the 1993 Series Bonds maturing on and after October 1, 2005. The 2001 Series Bonds will be reflected as obligations on the Authority's books, and any gain or loss on extinguishment will be reflected in the Authority's records as of the Crossover Date. On and after the Crossover Date, the refunded portion of the 1993 Series Bonds will no longer be outstanding and will cease to be entitled to any lien on the revenues pledged to payment of those bonds. Instead, the revenue stream originally pledged to secure the refunded portion of the 1993 Series Bonds will "cross over" to pay debt service on the 2001 Series Bonds. The Crossover Bonds and 2001 Series Bonds bear interest at a rate of 5% and 5.25%, payable on April 1 and October 1 of each year, commencing April 1, 2004 and maturing in 2017.
29
30
7. INVESTMENTS HELD BY TRUSTEE As of June 30, 2002, investments are collateralized with securities held by the Authority's trustee. The amortized cost, which approximates fair value due to the short-term nature of the held-to-maturity investments, of the investment securities at June 30 is as follows: 2002 Repurchase agreement U.S. government securities Total held-to-maturity investments $ 7,146,663 2,568,910 $ 9,715,573
On September 19, 1996, the Authority entered into a repurchase and custody agreement with MBIA Investment Management Corporation ("IMC") wherein the Authority agreed to effect a series of repurchase transactions with IMC, in investments allowable under the bond resolution agreements and state law, with a fixed earnings rate of 6.95 percent. The securities are held in trust by Bank One of Arizona, N.A. If at any time the aggregate market value of all purchased securities is less than the amount required under the repurchase and custody agreement (calculated using a percentage of 104%), the Authority may require IMC to transfer additional securities so the aggregate market value of all securities will equal or exceed such requirement. 8. NET ASSETS Allocations of net assets for specified purposes are authorized and designated by the Commission, under provision of the Arizona Power Authority Act of 1944, as amended. The designated reserves shown on the accompanying statement of net assets are comprised of the following at June 30, 2002: 2002 Resource development Operations fund Power contracts System improvement and repairs Total 9. RETIREMENT PLAN The Authority contributes to the retirement plan described below. Benefits are established by state statute and generally provide retirement, death, long-term disability, survivor, and health insurance premium benefits. The Arizona State Retirement System (the "Plan" or "ASRS") administers a cost-sharing multiple-employer defined benefit pension plan that covers permanent, full-time employees of the Authority. The ASRS is governed by the Arizona State Retirement System Board according to the provisions of ARS Title 38, Chapter 5, Article 2. The ASRS issues a publicly available financial report that includes its financial statements and required supplementary information. A report may be obtained by writing or calling the plan at 1020 East Missouri Avenue, Phoenix, Arizona 85014, (602) 255-5575. The Plan was established by the State of Arizona to provide benefits for employees of the state and employees of participating political subdivisions and school districts. The Plan became effective on July 1, 1971. By actuarial computation, employee member and Authority contributions to the Plan were fixed at 2.49 percent (2.00 percent retirement and .49 percent long-term disability) of their compensation for the year ended June 30, 2002, with the contributions made through payroll deductions. Employee contributions vest immediately. Total contributions to the Plan for the year ended June 30, 2002 by the Authority's covered employees were $12,728. $ 3,500,000 200,000 100,000 200,000 $ 4,000,000
9. RETIREMENT PLAN (CONTINUED) Matching employer member contributions were actuarially determined and fixed at the same rate as employee member contributions for the year ended June 30, 2002. In the event the Plan's actuary determines that additional contributions are needed in order to amortize an unfunded accrued liability, every employer member will be required to contribute the revised contribution percentage which is established by the Arizona State Legislature. All full-time employees of the Authority are required to become members of the Plan. The Authority's total payroll for employees covered by this Plan for the years ended June 30, 2002 was $521,521. Contributions to the Plan by the Authority for its covered employees vest over five years. All required employer contributions are made to the Plan by the end of each month. 10. ADDITIONAL BENEFITS In addition to the pension benefits described above, ASRS offers health care benefits to retired and disabled members that are no longer eligible for health care benefits through their former member employer's group health plan. Retired is defined as actively receiving an annuity benefit and disabled is defined as receiving a long-term disability ("LTD") benefit through the LTD program administered by ASRS. The following chart illustrates the maximum amount of the monthly available benefit for eligible members and their dependents: MEMBER Years of Credited Service 5.0 - 5.9 6.0 - 6.9 7.0 - 7.9 8.0 - 8.9 9.0 - 9.9 10.0+ Percent of Premium Benefit 50% 60% 70% 80% 90% 10 0 % Not Medicare Eligible $ 75.00 90.00 105.00 120.00 135.00 150.00 Medicare Eligible $ 50.00 60.00 70.00 80.00 90.00 100.00 DEPENDENT(S) Not Medicare Eligible $ 130.00 156.00 182.00 208.00 234.00 260.00 Medicare Eligible $ 85.00 102.00 119.00 136.00 153.00 170.00
31
11. PURCHASED POWER, SALES AND TRANSMISSION COMMITMENTS The Authority is party to Firm Electric Service and Transmission Service Contracts with terms expiring September 30, 2017. This requires the Authority to pay approximately 19 percent of Western's revenue requirements each operating year until the contract expires. During the year ended June 30, 2002, the Authority paid $15,344,365 for Purchased Power under this contract. The Authority is obligated to pay these costs under the contract even in the unlikely event that no power is supplied. During the year ended June 30, 2002, the Authority paid $5,204,148 for related transmission costs to Western. The Authority has sales contracts with all customers. Under these contracts, customers are obligated to pay for their percentage allocation if any Hoover power is delivered or made available for delivery. These sales contracts expire September 30, 2017, but some can be terminated by the Authority on June 1, 2007 or thereafter. The Authority also has contracts with Salt River Project for purchase and transmission of power to the Authority's customers. Under the transmission contract, the Authority must pay an annual transmission fee of $63,898 until September 30, 2017.
32
SUPPLEMENTAL SCHEDULE STATEMENT OF OPERATIONS OF THE HOOVER UPRATING
JUNE 30, 2002 REVENUE FUND OPERATING ACCOUNT
MONTHLY PAYMENT RESERVE ACCOUNT
OPERATING REVENUES Operating expenses: Purchased power Western credits Amortization of Hoover Uprating Program costs Transmission and distribution Administrative and general Other Total operating expenses Operating income (loss) Other income (deductions): Interest expense Deferred interest expenses Interest income Other, net Total other income (deductions) Change in net assets
$ 22,256,521
$
-
$
-
-
15,344,365 (4,623,123) 4,623,123
-
-
5,204,148 1,098,598 18,142
-
22,256,521
21,665,253 (21,665,253)
-
76,296 2,323
-
25,180 -
$ 22,256,521
78,619 $ (21,586,634) $
25,180 25,180
33
FUND - INDIVIDUAL FUNDS AND ACCOUNTS
CONSTRUCTION FUND
DEBT SERVICE ACCOUNT
DEBT SERVICE RESERVE ACCOUNT
RESOURCE DEVELOPMENT FUND
GENERAL RESERVES FUND
TOTAL
$
-
$
-
$
-
$
-
$
-
$
22,256,521
-
-
-
-
-
15,344,365 (4,623,123) 4,623,123
-
-
-
-
-
5,204,148 1,098,598 18,142
-
-
-
-
-
21,665,253 591,268
(82,842) -
(3,646,324) 2,977,031 34,471 -
496,131 -
-
-
(3,729,166) 2 ,97 7 ,031 632,078 2,323
(82,842) $ (82,842)
(634,822) $ (634,822) $
496,131 496,131 $
$
$
(117,734) 473,534
NOTE: The above supplemental schedule includes all funds and accounts, as defined by the APA Power Resource Revenue Bond Resolution.
34
SUPPLEMENTAL SCHEDULE - STATEMENT OF INCOME AS DEFINED UNDER THE POWER RESOURCE REVENUE
JUNE 30, 2002 REVENUE FUND CHANGE IN NET ASSETS Adjustments to net income (loss) under the power resource revenue bond resolution: Changes in assets and liabilities: Accounts receivable Interest receivable Prepaid purchased power Accounts payable Power contracts payable Other adjustments: Amortization of premiums and discounts on investments Cash from trustee funds Amortization of discount on bonds payable Change in advances for Hoover Uprating Program Income (loss) as defined under the power resource revenue bond resolution June 30, 2002 cash and investment balance $ 22,256,521 OPERATING ACCOUNT $ (21,586,634)
MONTHLY PAYMENT RESERVE ACCOUNT $ 25,180
667,262 -
4,268 6,700 585,614 32,931 (591,413)
23,938 -
-
-
-
-
-
-
$ 22,923,783
$ (21,548,534)
$
49,118
$
-
$
2,532,576
$
-
(LOSS) OF THE HOOVER UPRATING FUND BOND RESOLUTION
35
CONSTRUCTION FUND $ (82,842)
DEBT SERVICE ACCOUNT $ (634,822)
DEBT SERVICE RESERVE ACCOUNT $ 496,131
POWER RESOURCE GENERAL RESERVES DEVELOPMENT FUND FUND $ $ $
TOTAL 473,534
-
7,144 -
-
-
-
671,530 37,782 585,614 32,931 (591,413)
82,842
3,909 (1,383,614) -
3,167 (405,659) -
-
-
7,076 (1,789,273) 82,842
1,115,428
-
-
-
-
1,115,428
$
1,115,428
$ (2,007,383)
$
93,639
$
-
$
-
$
626,051
$
-
$ 2,316,931
$ 7,398,642
$
-
$
-
$ 12,248,149
NOTE: The above supplemental schedule includes all funds and accounts, as defined by the APA Power Resource Revenue Bond Resolution.
36
DEBT SERVICE COVERAGE RATIO OF THE HOOVER UPRATING FUND
YEAR ENDED JUNE 30, 2002 (UNAUDITED)
NET INCOME Add: Interest Expense (1) Amortization (1) Depreciation (1) Western Credits Credits to Customers for Prior Year Total Additions Deduct: Deferred Interest Expense Total Deductions Income available for debt service Debt service (2) Debt service coverage ratio
(1)
$
473,534 3,646,3241 82,8421 18,1421 4,623,1231 419,818 8,790,2481
(2,977,031) (2,977,031) $ 6,286,7511 $ 4,733,8241 1.331
Interest expense, depreciation expense and amortization of Uprating Costs are not expenses under the Bond Resolution. Debt Service is the total of Principal and Interest Expense accrued between July 1, 2001 and June 30, 2002.
(2)
ARIZONA POWER AUTHORITY
1 8 1 0 WEST ADAMS STREET P H O E N I X , ARIZONA 85007 ( 6 0 2 ) 542-4263 FA X (602) 253-7970
P H OT O S COURTESY OF THE BUREAU OF RECLAMATION AND WESTERN AREA POWER ADMINISTRATION

Copyright to this resource is held by the creating agency and is provided here for educational purposes only. It may not be downloaded, reproduced or distributed in any format without written permission of the creating agency. Any attempt to circumvent the access controls placed on this file is a violation of United States and international copyright laws, and is subject to criminal prosecution.

THE ENERGY OF FORESIGHT
ARIZONA POWER 44TH ANNUAL
AUTHORITY R E P O R T
TABLE OF CONTENTS
LETTER TO THE GOVERNOR REPORT OF THE EXECUTIVE DIRECTOR REPORT OF THE COMMISSION NEW FACES FOR THE FUTURE MODELING IMPROVED PERFORMANCE WATER YEAR 2002 ENVIRONMENTAL ISSUES SCHEDULE OF CAPACITY AND ENERGY SALES HISTORICAL ENERGY SALES FINANCIALS 2002 REPORT OF INDEPENDENT ACCOUNTANTS MANAGEMENT'S DISCUSSION AND ANALYSIS
(REQUIRED SUPPLEMENTARY INFORMATION)
1 2 4 6 7 8 9 10 11 12 13 14
FINANCIAL STATEMENTS DEBT SERVICE COVERAGE RATIO
20 36
LETTER TO THE GOVERNOR
1
December 1, 2002 The Honorable Jane D. Hull Governor of Arizona State Capitol Ninth Floor, West Wing Phoenix, Arizona 85007 Dear Governor: This 44th Annual Report of the Arizona Power Authority details the Authority's operational and financial activities for the fiscal year ending June 30, 2002. This Annual Report also features the steps the Authority has taken to become a forward-looking power participant in the Southwest, as the industry shifts to an open, competitive marketplace. Through its active role in Hoover Dam's engineering and operating functions, the Authority provides reliable energy to its customers at one of the lowest rates in the nation. In addition, the Authority is helping to define the role of public power within Arizona's new deregulated electric utility environment. As the Authority assesses the future of open competition in power generation and distribution, it remains focused on its original mandate--to provide "the greatest public service and to encourage the widest practical use of electrical energy." Sincerely,
Jewell M. Lewis Chairman
2
REPORT OF THE EXECUTIVE DIRECTOR
L O O K I N G FORWARD TO ON-GOING EXCELLENCE
JOE MULHOLLAND
Like the energy sector as a whole, the Arizona Power Authority is facing a period of unprecedented change. Challenges as well as opportunities are rapidly emerging as the industry continues to spiral toward deregulation. It's difficult to predict the actual impact deregulation will have on the Authority, but we know the new conditions will require new policies. While we are proud of our past accomplishments, the Authority is now looking ahead to new ways of ensuring our customers' access to reliable, affordable power. Undoubtedly our strongest resource in preparing for the changes to come is our people. The Authority has recently augmented its team with additional aggressive, forward thinking staff members. Collectively, we now possess expertise covering the entire spectrum of the power business. This includes wholesale and retail marketing, as well as generation, transmission, distribution and ancillary services. The Authority is also well positioned to influence future energy policy. For the first time, the Authority has a seat on the board of directors of the Western Electricity Coordinating Council (WECC), which defines policy for the western United States. One of only three directors' seats to the entire state of Arizona, this places the Authority at the forefront of new planning, trends and technologies.
The Authority is also chairing the High Voltage subcommittee of the Central Arizona Transmission Study Group (CATS). CATS is a peer review group that advises the industry on building transmission in the central part of the state. The Authority's position will help ensure transmission for rural areas located between super high voltage lines and distribution facilities. With an eye to the future, we're maintaining our strong financial footing today. In addition, the Arizona Power Authority is investigating opportunities for greater interaction with power providers in Mexico and the Arizona-Mexico commission. The Authority is also exploring options in renewable energy sources through potential strategic partnerships. We've delivered a 37% rate reduction to our customers and are committed to continued outstanding service. Becoming a major planning entity and participant in power development in the Southwest will help ensure the Authority fulfills its mandate into the future.
ANNUAL REPORT 2002
4
REPORT OF THE COMMISSION
The Arizona Power Authority is advancing the role of public power in Arizona in the new era of deregulation. The Authority is also moving forward to assure an adequate supply of electric transmission capability for its customers and the state. To this end, the Authority is an active participant in the Western Electric Coordinating Council and the Central Arizona Transmission Study Group. The Authority has also retained three new staff members with over 90 years of combined experience in the power industry in the western United States. Through the concerted effort of the Commissioners and staff, the Authority was able to lower its rates by 37%. The Commissioners played an important part in supporting staff to negotiate a new Scheduling Entity Agreement, which provides for efficient use of Arizona's hydroelectric power. The Authority recognizes that transmission is fundamental to the success of open competition in the industry and is a consistent advocate for adequate and reliable service. The Authority's Commissioners and staff continue to work closely with the Bureau of Reclamation and the Western Area Power Administration to maintain the Hoover Dam and associate power system as a valuable resource to the State of Arizona. The Authority will also keep working to protect the environment and endangered species to preserve the Colorado River as a water and power resource.
JEWELL M. LEWIS
MICHAEL C. FRANCIS
Jewell Lewis was originally appointed to the Commission in 1986 and is now serving as Chair. Her present term expires in 2004. Dr. Lewis is also a member of the Arizona Prenatal Board of Trustees, the NAU Center for Excellence in Education Advisory Board and the Governor's Advisory Committee on Quality Education. Last year Dr. Lewis was named Valley Leadership Woman of the Year. Dr. Lewis has often been recognized for her leadership in business as well as her generous charitable work on behalf of medicine, education and the arts.
Michael Francis began his tenure on the Commission in 1999, and his current term extends until 2008. Mr. Francis is now serving as the Commission's Vice Chair. He is also a partner in Santa Lucia Farms, which produces more than 3.7 million garden rose bushes annually. In addition to farming, Francis owns and operates Francis Insurance Agency, which writes insurance for Arizona and California farmers. A member of the American Rose Society, Mr. Francis currently serves on the Agricultural Employment Relations Board for the State of Arizona and is a member of the M&I Thunderbird Bank Board of Directors Arizona Region.
5
LIEUTENANT GENERAL
JOHN I. HUDSON
US MARINE CORPS (RETIRED)
RICHARD S. WALDEN
DALTON H. COLE
John Hudson is Chairman of the Greater Yuma Port Authority and is a founding Director of the Foothills Bank in Yuma. General Hudson was first appointed to the Arizona Power Authority Commission in March 2000, and his current term runs to 2006. General Hudson served in the U.S. Marine Corps for 37 years. He was a founding member of the Foothills Optimist Club of Yuma, a member of the Yuma Rotary Club and past president of Yuma's 78-CRIME Board of Directors.
Richard (Dick) Walden was appointed to the Commission in 1984 and has been re-appointed through his present term expiring in 2004. Mr. Walden is also a commissioner to the Arizona Water Banking Authority, and a member of the Advisory Council on Small Business and Agriculture of the Federal Reserve Bank of San Francisco. Dick Walden is also President and CEO of Farmers Investment Company, a family-owned pecan growing and processing company headquartered in Sahuarita, Arizona.
Dalton Cole was appointed to the Commission in January 2002, for a term that expires in 2008. A retired businessman and farmer, Mr. Cole served as a member of the Central Arizona Water Conservation District. He also co-founded and chaired the HoHoKam Irrigation District and is a past chairman of the State Board of Directors for Community Colleges. Mr. Cole has also served on the Ground Water Management Committee for Pinal County and on committees to advise the Arizona Legislature regarding water matters throughout the state.
6
NEW FACES FOR THE FUTURE
In keeping with its focus on fresh developments and emerging issues, the Arizona Power Authority has hired three new staff members this year. Collectively, they bring over 90 years of combined experience in the power industry. Wise with experience, they are forward looking in attitude and charged with enthusiasm.
STEVE MENDOZA, P.E.
Steve Mendoza is the APA's Chief Engineer. With 37 years of utility industry experience, including planning, design, construction, operations and customer service, Steve brings extensive engineering management acumen as well as hands-on understanding. In addition, Steve is a member of the highly influential Board of Directors of the Western Electricity Coordinating Council, giving the Authority a significant voice in Western States power reliability and policy development. Mr. Mendoza is a Professional Engineer in Arizona, California and New Mexico.
HARVEY W. BOYCE
Harvey W. Boyce is Director of Finance and Rates. Harvey joins the Arizona Power Authority after thirty-four years with the Department of the Interior's Bureau of Reclamation and National Park Service, the Department of Energy's Western Area Power Administration and the United States Navy. Mr. Boyce also spent over three years as a power operations specialist with Nevada's Colorado River Commission. He has worked in various aspects of state and federal accounting, contract administration, and marketing and is recognized as an expert in federal power repayment studies, development and implementation.
AUDREY COLLETTI
Audrey Colletti is the Power and Computer Operations Manager. Audrey has over two decades of professional experience including such areas as process analysis, office organization and automation, presentation preparation and customer service. In addition, Audrey brings an excellent understanding of network administration, computer programming and hardware installation. Her technical expertise also covers database programming, system administration and end user training and support.
MODELING IMPROVED PERFORMANCE
Technology plays a central role in enabling the Arizona Power Authority to plan for the future. This year the Authority staff received extensive training in electric power software that enables them to model power transmission throughout the entire western U.S., as well as focusing on local areas such as particular regions of Arizona. The Authority uses its modeling software to study anticipated conditions on the power system and determine how specific changes impact the overall system. By more clearly understanding the power we're purchasing, we can provide better service to our customers. In addition, as customer contracts come up for renewal, the Authority can model planned distribution to choose the most appropriate and efficient path. In addition, this software also makes it easier to illustrate the power system to our customers. Simple to understand graphics provide a clear representation of the power system. As a result, our customers can better understand the power they receive and the factors that influence it.
7
8
WATER YEAR 2002
O P E R AT I O N S SUMMARY AND RESERVOIR STATUS
Drier than average conditions have prevailed for the past three years in the Colorado River basin. As a result precipitation has decreased from 87% of normal in September 2001 to 58% in September 2002. The Colorado Basin snowpack measured 74% of normal in January 2002. Total unregulated inflow into Lake Powell dropped from an already low 59% in 2001 to 25% in 2002, making it the driest year on record. In September 2002, the elevation of Lake Powell was 3,627 feet, a decrease of 38 feet for the year and 73 feet below full pool elevation. The National Weather Service continues to forecast drier than normal conditions. The 25% inflow level in 2002 resulted in only 3.66 million acre-feet, the lowest unregulated inflow recorded since Glen Canyon Dam was completed in 1963. Subsequently, 2002 water storage for Lake Powell dropped to 14.5 million acre-feet, or 59% of capacity. By September 2002, the elevation of Lake Mead dropped to 1,156 feet, which is 73 feet below full pool elevation. Storage in Lake Mead dropped to 17.1 million acre-feet, or 66% of capacity. Because of the drawn down condition of Lake Powell, releases from that lake in water year 2003 are scheduled to meet the minimum objective release of 8.23 million acre-feet. This is consistent with requirements of the 1970 Criteria for Coordinated Long-Range Operation of Colorado River Reservoirs. Hydrologic conditions often change and the actual operation and condition of the Colorado River Storage System will depend on downstream requirements and the weather conditions in the Colorado River basins during the 2002-2003 water year.
Lake Powell 3,700 Feet At Full Capacity
RESERVOIR STATUS SEPTEMBER 2002
Lake Mead 1,229 Feet At Full Capacity 3,627 Feet
1,156 Feet
ENVIRONMENTAL ISSUES
The Bureau of Reclamation has issued its 2003 Water Year Annual Operating Plan for the Colorado River. The Plan reflects the assumed effects of the California water right holders executing a settlement agreement that would allow Reclamation to continue to declare a quantified surplus of water under its Interim Surplus Criteria Guidelines. This will allow California to take up to fifteen years (from 2002) to reduce its use of Colorado River water to its legal limit. Activities such as water diversions and power production on the Lower Colorado River continue to be monitored for their impact on endangered and threatened species under the Multi-Species Conservation Program (MSCP). The MSCP will be implemented over a 50-year period, and will address future federal agency consultation needs under Section 7 and the incidental take authorizations under Section 10 of the Endangered Species Act. In lieu of funds from the Arizona Legislature, Arizona's share of costs for the MSCP process was covered by contributions from Arizona water and power interests. A lawsuit brought by Defenders of Wildlife against Reclamation remains in litigation. The suit alleges violation of the Endangered Species Act in failing to evaluate and compensate for the impacts of Colorado River operations on listed species in the Mexican delta. If Defenders prevail, Reclamation may be required to take actions that will be costly to the water and power users in the Lower Colorado River Basin.
9
10
SCHEDULE OF CAPACITY AND ENERGY SALES
FOR PERIOD OF JULY 1, 2001 THROUGH JUNE 30, 2002 AVERAGE BILLING DEMAND (KW) 5,330 534 2,525 136,945 788 5,457 0 16,484 13,474 16,483 12,516 297 6,788 8,897 20,508 2,110 7,491 7,704 2,026 1,500 2,729 5,730 32,871 442 602 1,313 2,467 882 1,763 889 1,941 0 0 0 0 0 0 0 0 319,486 194,381 0 ENERGY DELIVERED (KWH) 10,288,000 1,722,000 8,185,000 385,469,000 3,744,000 16,500,000 0 93,064,000 61,017,000 62,076,000 33,438,000 866,000 16,244,000 14,677,000 59,250,000 10,098,000 17,652,000 15,757,000 10,664,000 957,000 13,186,000 34,731,000 171,347,000 4,118,000 4,869,000 5,578,000 9,628,000 2,453,000 11,768,000 5,442,000 12,920,000 0 0 0 0 0 0 0 0 1,097,708,000 $ $ $ MILLS PER KWH 17.75 16.34 17.36 15.35 12.60 12.89 0.00 14.06 14.48 13.90 13.93 11.15 13.66 18.89 16.98 17.55 17.99 17.24 12.65 10.51 16.76 11.37 14.58 12.28 12.89 16.95 14.63 15.23 13.69 13.56 12.53 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 14.92
SALE OF HYDRO POWER Customers
Aguila Irrigation District Avra Valley Irrigation & Drainage District Buckeye Water Conservation District Central Arizona Water Conservation District Chandler Heights Citrus Irrigation District Cortaro-Marana Irrigation District Electrical District No. 1, Pinal Electrical District No. 2, Pinal Electrical District No. 3, Pinal Electrical District No. 4, Pinal Electrical District No. 5, Pinal Electrical District No. 5, Maricopa Electrical District No. 6, Pinal Electrical District No. 7, Maricopa Electrical District No. 8, Maricopa Harquahala Valley Power District Maricopa County Municipal Water District #1 McMullen Valley Water Conservation & Drainage District Ocotillo Water Conservation District Queen Creek Irrigation District Roosevelt Irrigation District Roosevelt Water Conservation District Salt River Project San Tan Irrigation District Silverbell Irrigation & Drainage District Tonopah Irrigation District Wellton-Mohawk Irrigation & Drainage District City of Page City of Safford Town of Thatcher Town of Wickenburg Ak-Chin Indian Community Arizona Electric Power Cooperative Arizona Public Service Co. Citizens Utilities Co. City of Mesa Tohono O'odham Utilities Authority San Carlos Project Tucson Electric Power Co. TOTAL HYDRO POWER SALES TOTAL SUPPLEMENTAL POWER SALES OTHER ELECTRIC SALES TOTAL SALES
*Difference between Total Electric Sales and Operating Revenue is due to post-closing reconcilliation of estimate to actual deliveries between the Authority and Western Area Power Administration
SALES ($) 182,646 28,137 142,112 5,917,303 47,178 212,620 0 1,308,722 883,283 863,148 465,632 9,654 221,919 277,222 1,006,239 177,258 317,483 271,697 134,893 10,054 221,022 394,855 2,498,801 50,554 62,767 94,562 140,874 37,369 161,118 73,777 161,952 0 0 0 0 0 0 0 0 16,374,851 661,409 33,947
$17,070,206.77 *
HISTORICAL ENERGY SALES
11
The following graph illustrates the Authority's historical energy sales (GWh) since 1994 for power obtained from the Hoover Powerplant and for supplemental sales.
Supplemental power is obtained by the Authority for sale to customers on an "as requested" basis. This energy augments the customers' allocation from the Authority.
FISCAL YEAR
HOOVER SUPPLEMENTAL TOTAL
1994
734 25 759
1995
773 65 838
1996
792 224 1,016
1997
1,485 79 1,564
1998
1,389 3 1,392
1999
1,318 2 1,320
2000
1,205 4 1,209
2001
1,103 0 1,103
2002
1,098 0 1,098
GWh
1500 1400 1300 1200 1100 1000 900 800 700 600 500 400 300 200 100 0
HOOVER ENERGY SALES
SUPPLEMENTAL ENERGY SALES
1994
1995
1996
1997
1998
1999
2000
2001
2002
12
FINANCIALS 2002
F I N A N C I A L TABLE OF CONTENTS
REPORT OF INDEPENDENT ACCOUNTANTS MANAGEMENT'S DISCUSSION AND ANALYSIS
(REQUIRED SUPPLEMENTARY INFORMATION)
13 14
FINANCIAL STATEMENTS STATEMENT OF NET ASSETS: STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS STATEMENT OF CASH FLOWS NOTES TO FINANCIAL STATEMENTS SUPPLEMENTAL SCHEDULE: STATEMENT OF OPERATIONS OF THE HOOVER UPRATING FUND STATEMENT OF INCOME (LOSS) OF THE HOOVER UPRATING FUND DEBT SERVICE COVERAGE RATIO
20 20
21 22 24
32
34 36
REPORT OF INDEPENDENT ACCOUNTANTS
13
To the Arizona Power Authority Commission In our opinion, the accompanying statement of net assets and the related statement of revenues, expenses, and changes in net assets, and statement of cash flows present fairly, in all material respects, the financial position of the Arizona Power Authority (A Body, Corporate and Politic, of the State of Arizona) at June 30, 2002, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As described in Note 1, the Authority adopted the provisions of the Governmental Accounting Standards Board ("GASB") Statement No. 34, Basic Financial Statements - and Management's Discussion and Analysis - for State and Local Governments, as amended by GASB Statement No. 37, Basic Financial Statements and Management's Discussion and Analysis - for State and Local Governments: Omnibus - an Amendment of GASB Statements No. 21 and No. 34 and GASB Statement No. 38, Certain Financial Statement Note Disclosures, as of July 1, 2001. The management's discussion and analysis is not a required part of the financial statements but is supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the supplementary information. However, we did not audit the information and express no opinion on it. The supplemental schedules on pages 34 through 37 are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects when considered in relation to the basic financial statements taken as a whole.
Pricewaterhouse Cooper L.L.P. August 2, 2002 Phoenix, Arizona
14
MANAGE ME NT'S DISCUSSION AND ANALYSIS
The following is a discussion and analysis of the Arizona Power Authority's (the "Authority") financial performance for the fiscal year ended June 30, 2002 and is designed to (a) assist the reader in focusing on significant financial issues, (b) provide an overview of the Authority's financial activity, (c) identify changes in the Authority's financial position. Since the Management's Discussion and Analysis ("MD&A") is designed to focus on the current year's activities, resulting changes and currently known facts, please read it in conjunction with the Authority's financial statements beginning on page 22.
HIGHLIGHTS
FINANCIAL HIGHLIGHTS The Authority's net assets decreased by $400,516 or 11%. The Authority's revenue increased by $2,284,061 or 11% and the net results from operations reduced the operating loss by $343,685 or 46% producing a decrease in net assets of $400,516. AUTHORITY HIGHLIGHTS Revised Scheduling Entity Agreement - On June 1, 1987, the Authority and the Salt River Project entered into a Scheduling Entity Agreement that provided for the Salt River Project to be the entity that dynamically schedules the Hoover generation allocated to the Authority by the Western Area Power Administration. The Agreement had been amended twice through September 30, 2001. The Authority and the Salt River Project executed a third Amendment to the Scheduling Entity Agreement effective October 1, 2001. This Amendment provides for the Salt River Project to pay the Authority $8.4 million each year in return for allowing the Salt River Project to continue to be the Scheduling Entity of the Hoover generation in Arizona through September 30, 2004. The amount of revenue paid by the Salt River Project for the year ending June 30, 2002 covered only nine months; consequently, the contribution to revenue pursuant to the Scheduling Entity Agreement was $6.3 million, not $8.4 million. Negotiations are currently under way to extend the Scheduling Entity Agreement and the $8.4 million annual payment by the Salt River Project for at least an additional two years. Other Changes That Will Improve or Provide Future Benefit to the Arizona Power Authority No new agreements or new customers were added during the current period. However, the Authority added three new staff members in recent months that bring substantial experience and knowledge regarding the operations of power systems in the southwest.
15
USING THIS ANNUAL REPORT
This annual report consists of a series of financial statements. The Statement of Net Assets, the Statement of Net Assets, Revenues, Expenses and Changes in Net Assets and the Statement of Cash Flows (on pages 20-23) provide information about the activities of the Authority as a whole and present a longer-term view of the Authority's finances. The Authority is a body corporate and politic of the State of Arizona and is a special-purpose government engaged only in business-type activities. Accordingly, the financial statements presented in this Annual Report are the required basic financial statements in accordance with the provisions of Governmental Accounting Standards Board Statement No. 34, Basic Financial Statements and Management's Discussion and Analysis for State and Local Governments. There are six basic or normal transactions that will affect the comparability of the Statement of Net Assets summary presentation: Net Results of Activities which will impact (increase/decrease) current assets and undesignated net assets. Borrowing for Capital which will increase assets and long-term debt. Spending Borrowed Proceeds on New Capital which will reduce current assets and increase capital assets. There is a second impact, an increase in invested capital assets and an increase in related net debt which will not change the investment in capital assets, net of debt. Spending of Non-borrowed Current Assets on New Capital which will (a) reduce current assets and increase capital assets and (b) will reduce undesignated net assets and increase investment in capital assets, net of debt. Principal Payment on Debt which will reduce current assets and reduce long-term debt. Reduction of Capital Assets through Depreciation which will reduce capital assets and investment capital assets, net of debt.
OVERVIEW OF THE FINANCIAL STATEMENTS
This Discussion and Analysis is an introduction to the Authority's basic financial statements, which are comprised of two components: (1) Fund Financial Statements. (2) Notes to the Financial Statements. Fund Financial Statements (Reporting on all of the Authority's Funds.) The Fund Financial Statements begin on page 20 and provide detailed information about the individual funds. A fund is a fiscal and accounting entity with a self-balancing set of accounts that the Authority uses to keep track of specific sources of revenues and disbursements for specific purposes. The Authority's funds are treated as proprietary and are enterprise in nature. Most of the Authority's financial dealings are with contracts outside of state government. A separate fund is not maintained for government activities. The Authority does not act as a fiduciary.
16
CONDENSED STATEMENT OF NET ASSETS BUSINESS TYPE ACTIVITIES
(THOUSANDS OF DOLLARS) JUNE 30, 2002 Current assets Long-term assets Capital assets 13,102,938 51,832,754 181,499 65,117,191 Current liabilities Long-term (Bonds pay, net) Net Assets: Capital Assets Unrestricted Net Assets, End of Year 181,499 2,942,661 3,124,160 190,987 3,333,689 3,524,676 -9,488 -391,028 -400,516 -5% -12% -11% 5,476,945 56,516,086 61,993,031 JUNE 30, 2001 14,673,921 52,948,182 190,987 67,813,090 4,622,973 59,665,441 64,288,414 DIFF $ -1,570,983 -1,115,428 -9,488 -2,695,899 853,972 -3,149,355 -2,295,383 DIFF % -11% -2% -5% -4% 18% -5% -4%
The largest component of the Authority's net assets is unrestricted reserves (property replacement, designated and undesignated). CONDENSED STATEMENT OF NET ASSETS DISCUSSION Current Assets changed because the Authority's customers accounts receivable decreased due to having less power available for sale, interest receivable on investments decreased due to much lower interest rates and prepaid purchased power (banked power) decreased due to having less power available for banking. Long Term Assets (Advances for the Hoover Uprating Program) changed because of the reduction in the cost of the current year Uprating Program and more of the prior year charges being amortized. Current Liabilities changed primarily due to the establishment of a bonds payable accrual, a decreased power contracts payable and the elimination of the Authority's customer credits accrual. Long Term Liabilities changed because of a decrease in bonds payable due to reclassification to a current liability, a decrease in the discount on bonds payable due to amortization and an increase in the investments held by Trustee due to an accrual for the payment of bond principal. Net Assets changed because of decreases in capital assets, property replacement and undesignated assets.
17 There are six basic or normal transactions that will affect the comparability of the Statement of Changes in Net Assets summary presentation. REVENUES: Economic Condition which can reflect a declining, stable or growing economic environment and has a substantial impact on rates and volumes of consumption. Increase/Decrease in Commission Approved Rates while certain aspects of rates are set by statute, the Authority has the ability to impose and periodically increase/decrease rates. Market Impacts on Investment Income market conditions may cause investment income to fluctuate more in the long-term than alternative shorter-term options. EXPENSES: Introduction of New Programs individual programs may be added or deleted to meet changing Authority needs. Increase/Decrease in Authorized Personnel changes in service demand may cause the Authority to increase/decrease authorized staffing. Staffing costs (salary and related benefits) represent 2.5% of the Authority's operating costs. Salary Increases (cost of living, merit and market adjustment) the ability to attract and retain human and intellectual resources requires the Authority to strive to approach a competitive salary range position in the marketplace.
18
CHANGES IN NET ASSETS BUSINESS TYPE ACTIVITIES
(THOUSANDS OF DOLLARS) JUNE 30, 2002 Revenues: Operating Revenues Expenses: Operating Expenses Purchase Power Western Credits Amortization of Hoover Uprating Program Costs Trans & Dist Administrative and general Depreciation Other Total Operating Expenses Operating Income (loss) Other (deductions) income: Interest Expense Deferred Interest Expense Interest Income Other Net Total Other Income (loss) Change in Net Assets Net Assets, Beginning of Year Net Assets, End of Year -3,729,166 2,977,031 746,533 2,323 -3,279 -400,516 3,524,676 $ 3,124,160 -3,729,166 2,727,681 1,207,760 18,030 224,305 -516,617 4,041,293 $ 3,524,676 0 249,350 -461,227 -15,707 -227,584 116,101 -516,617 $ -400,516 0% 9% -38% -87% -101% -22% -13% -11% 16,075,797 -4,623,123 15,077,567 -2,955,153 998,230 -1,667,970 7% 56% $ 23,018,463 $ 20,734,402 $ 2,284,061 11% JUNE 30, 2001 DIFF $ DIFF %
4,623,123 5,205,863 1,215,200 28,855 889,985 23,415,700 -397,237
2,955,153 5,215,104 1,028,848 37,473 116,332 21,475,324 -740,922
1,667,970 -9,241 186,352 -8,618 773,653 1,940,376 343,685
56% 0% 18% -23% 665% 9% -46%
CHANGES IN NET ASSETS DISCUSSION Operating revenues changed because of increased power sales. Operating expenses changed because of increased purchased power costs; Western credits were increased because of the accrual of bonds payable principal and other costs related to the Uprating Program; amortization of Uprating Program costs increased because of the additional credits received; Administrative and general increased because of the hiring of additional employees and increased legal costs; depreciation decreased because less existing capital assets were available to depreciate and few new capital assets were purchased; and other costs increased because of the expensing of certain deferred assets. Operating loss changed due to a decrease in the loss compared to the prior year. Other items effecting a change in "Net Assets" were an increase in deferred interest expense because of less interest income and decreased late charges received from customers.
19
CAPITAL ASSETS
As of fiscal year end, the Authority had $181,499 invested in a variety of capital assets, as reflected in the following schedule, which represents a net decrease (additions less retirements and depreciation) of $9,488 or 5% from the end of last year. JUNE 30, 2002 Distribution Plant General Plant - Office $ 40,341 141,158 $ 181,499 JUNE 30, 2001 $ 49,038 141,949 $ 190,987
The following reconciliation summarizes the change in Capital Assets, which is presented in detail on page 28 of the Notes to the Financial Statements JUNE 30, 2002 Beginning Balance Additions Depreciation Ending Balance $ 190,987 19,367 (28,855) $ 181,499
DEBT OUTSTANDING
As of fiscal year-end, the Authority had $68,945,000 in debt outstanding, no change compared to last year. Also see page 28 of the Notes to the Financial Statements for a detailed summary of debt activity during the year.
BUSINESS TYPE ACTIVITIES
The following chart depicts the sources of revenues for the fiscal year: The Authority's revenues may decrease in the coming year(s) due to drought conditions. Insufficient rain and snow pack results in less water to be processed through the turbines at Hoover Dam thereby producing less hydroelectric power available for sale. Additional wet years, and other factors, could help stabilize revenues.
Hoover Power Sales $22,256,521 (93.64%) Other Income $2,323 (0.01%) Interest Income $746,533 (3.14%) Supplemental Power Sales $761,942 (3.21%)
The following chart depicts the types of expenses for the fiscal year:
Hoover Power Purchased $15,344,365 (63.49%) Supplemental Power Purchased $731,432 (3.03%)
For further information and/or questions on this report, please call the Power Authority Office at 602-542-4263.
Depreciation $28,855 (0.12%) Administrative & General $1,215,200 (5.03%)
Interest Expense $752,135 (3.11%) Other Cost $889,985 (3.68%)
Transmission & Distribution $5,205,863 (21.54%)
20
FINANCIAL STATEMENTS
STATEMENT OF NET ASSETS
JUNE 30, 2002
APA GENERAL FUND
HOOVER UPRATING FUND
TOTAL
ASSETS Current assets: Cash and cash equivalents Cash with fiscal agent Accounts receivable, customers power purchases Interest receivable Prepaid purchased power and other Total current assets Property, plant and equipment, net (Note 3) Advances for Hoover Uprating Program, net
(Notes 2 &5)
$
4,329,510 215,369 17,768 4,562,647 181,499 -
$
2,532,576 2,694,576 1,648,972 134,857 1 , 529,310 8,540,291 51,832,754
$
6,862,086 2,694,576 1,864,341 152,625 1,529,310 13,102,938 181,499 51,832,754
Total assets LIABILITIES Current liabilities: Accounts payable and other Power contracts payable Accrued interest payable Bonds payable Total current liabilities Bonds payable (Note 6) Discounts on bonds payable Less investments held by trustee, including unamortized net discount on investments of $3,566 (Note 7) Bonds payable, net Total liabilities NET ASSETS Net assets: Invested in capital assets Unrestricted: Property placement Designated Undesignated Total net assets
$
4,744,146
$
60,373,045
$
65,117,191
$
7,688 212,743 220,431 -
$
86,653 2,808,280 911,581 1 , 450,000 5,256,514 67,495,000 (1,263,341)
$
94,341 3,021,023 911,581 1,450,000 5,476,945 67,495,000 (1,263,341)
$ 220,431 $
(9,715,573) 56,516,086 61,772,600 $
(9,715,573) 56,516,086 61,993,031
$
181,499 1,030,150 4,000,000 (687,934)
$
(1,399,555)
$
181,499 1,030,150 4 ,000,000 (2,087,489)
$
4,523,715
$
(1,399,555)
$
3,124,160
The accompanying notes are an integral part of these financial statements.
21
STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS
JUNE 30, 2002
APA GENERAL FUND $ 761,942
HOOVER UPRATING FUND $ 22,256,521 $
TOTAL 23,018,463
OPERATING REVENUES Operating expenses: Purchased power Western credits (Note 5) Amortization of Hoover Uprating Project costs Transmission and distribution Administrative and general Depreciation Other Total operating expenses Operating income (loss) Other (deductions) income: Interest expense (Note 6) Deferred interest expense (Note 5) Interest income Other, net Total other income (loss) Increase (decrease) in net assets Net assets, beginning of the year Net assets, end of the year
731,432 1,715 116,602 28,855 871,843 1,750,447 (988,505)
15,344,365 (4,623,123) 4,623,123 5,204,148 1,098,598 18,142 21,665,253 591,268
16,075,797 (4,623,123) 4,623,123 5,205,863 1,215,200 28,855 889,985 23,415,700 (397,237)
114,455 114,455 (874,050) 5,397,765 $ 4,523,715 $
(3,729,166) 2 ,977,031 632,078 2,323 (117,734) 473,534 (1,873,089) (1,399,555) $
(3,729,166) 2, 9 7 7 , 0 3 1 746,533 2,323 (3,279) (400,516) 3,524,676 3,124,160
The accompanying notes are an integral part of these financial statements.
22
STATE ME NT OF CASH FLOWS
JUNE 30, 2002
APA GENERAL FUND
HOOVER UPRATING FUND
TOTAL
Cash flows from operating activities: Cash received from customers Cash payments to suppliers for goods or services Cash payments to employees for services
Net cash (used in) provided by operating activities
$
548,602 (884,184) (335,582)
$
22,928,051 (21,366,600) (521,521) 1,039,930
$
23,476,653 (22,250,784) (521,521) 704,348
Cash flows from capital and related financing activities: Interest payments on obligations Acquisition of capital assets Change in advances for Hoover Uprating Program
Net cash (used in) provided by capital and related financing activities Cash flows from investing activities: Interest on investments Purchase of investment securities Proceeds from sale and maturities of investment securities Net cash (used in) provided by investing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year
The accompanying notes are an integral part of these financial statements.
(19,367) -
(3,646,323) 4,094,782
(3,646,323) (19,367) 4,094,782
(19,367)
448,459
429,092
132,970 132,970 (221,979) 4,551,489 $ 4,329,510 $
669,860 (10,176,793) 8,394,596 (1,112,337) 376,052 4,851,100 5,227,152 $
802,830 (10,176,793) 8,394,596 (979,367) 154,073 9,402,589 9,556,662
(Continued)
23
JUNE 30, 2002
APA GENERAL FUND
HOOVER UPRATING FUND
TOTAL
Reconciliation of operating loss to net cash provided by (used in) operating activities: Operating loss Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation Changes in assets and liabilities: (Increase) decrease in accounts receivable Decrease in prepaid purchase power and other (Decrease) in accounts payable Increase (decrease) in power payable Increase in accrued annual leave Decrease in accounts payable customer credits Total adjustments Net cash (used in) provided by operating activities Supplemental schedule of non-cash capital and related financing activities: Deferred interest on obligations Supplemental schedule of cash paid for interest $ 28,855 28 , 8 5 5 $ (988,505) $ 591,268 $ (397,237)
(213,340) 624,954 (289) 212,743 652,923 (335,582) $
671,530 585,614 (15,646) (591,413) 48,577 (250,000) 448,662 1,039,930 $
458,190 1,210,568 (15,935) (378,670) 48,577 (250,000) 1,101,585 704,348
$ $
-
$ $
2,977,031 3,729,166
$ $
2,977,031 3,729,166
(Concluded)
The accompanying notes are an integral part of these financial statements.
24
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business The Arizona Power Authority (the "Authority") is a body, corporate and politic, without taxing power, established by the Arizona Legislature on May 27, 1944 by the Power Authority Act. Under the Power Authority Act, the Authority is directed to obtain electric power developed from the mainstream of the Colorado River and sell such power to certain qualified purchasers. The Power Authority Act provides that the Authority must be a self-supporting agency and prohibits the Authority from incurring any obligation, which would be binding upon the State of Arizona. The Authority supplies capacity and energy on a wholesale basis to certain power purchasers in the State of Arizona. The Authority's primary source of power and energy is the Hoover Power plant at Hoover Dam, located approximately 25 miles from Las Vegas, Nevada. Hoover power is produced by the Boulder Canyon Project hydropower plant owned by the Bureau of Reclamation. Hoover Dam is the highest and third largest concrete dam in the United States of America. Hoover Dam was dedicated in 1935 and the first generator of the Hoover Power plant was in full operation in October 1936 and has been in continuous operation since. Power and energy from the Hoover Power plant is transmitted to load centers in Arizona, California and Nevada. The Authority first contracted for Arizona's share of Hoover power in 1952 and has continuously provided power and energy to its customers since that time. The Authority is governed by a commission of five members appointed by the Governor and approved by the Senate. The term of office for each member is six years and the members select a chairman and vice-chairman from among its membership for two-year terms. Pursuant to Arizona law, the ("Commission") serves as the Authority's regulatory body with the exclusive authority to establish electric prices. The Authority is required to follow certain procedures, pertaining to public notice requirements and special meetings, before implementing changes in electric price schedules. Change in Accounting Policy Effective July 1, 2001, the Authority adopted Governmental Accounting Standards Board ("GASB") Statement No. 34, Basic Financial Statements - and Management's Discussion and Analysis - for State and Local Governments, as amended by GASB Statement No. 37, Basic Financial Statements and Management's Discussion and Analysis - for State and Local Governments: Omnibus - an Amendment of GASB Statements No. 21 and No. 34 and GASB Statement No. 38, Certain Financial Statement Note Disclosures. These statements established a new financial reporting model for state and local governments consisting of both the government-wide and fund financial statements (within the basic financial statements) and primary activities are categorized as either governmental or business type. The Authority is only engaged in business activities. In accordance with the provisions of paragraph 138 of GASB No. 34, this audit report presents the required basic financial statements for special-purpose governments engaged only in business-type activities. Accordingly, no significant change or impact resulted from the adoption of GASB No. 34, as amended by GASB No. 37 and No. 38.
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Measurement Focus The Authority's Funds are accounted for on a flow of economic resources measurement focus. All assets and liabilities (whether current or non-current) associated with their activity are included in the Statement of Net Assets. The Statement of Revenues, Expenses, and Changes in Net Assets present increases (revenues) and decreases (expenses) in total net assets. The Authority's reported total net assets are segregated into invested capital assets and unrestricted components. Basis of Accounting Basis of Accounting refers to the time at which revenues and expenses are recognized in the accounts and reported in the financial statements, regardless of the measurement focus applied. The accrual basis of accounting is used by the Authority whereby revenues are recognized in the accounting period in which they are earned and become measurable, and expenses are recognized when incurred. Basis of Presentation GASB No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting, requires that governments' proprietary activities apply all GASB pronouncements as well as the following pronouncements issued on or before November 30, 1989, unless those pronouncements conflict with or contradict GASB pronouncements, Financial Accounting Standards Board ("FASB") Statements and Interpretations, Accounting Principles Board Opinions and Accounting Research Bulletins. Governments are given the option whether or not to apply all FASB Statements and Interpretations issued after November 30, 1989, except for those that conflict with or contradict GASB pronouncements. The Authority has elected not to implement FASB Statements and Interpretations issued after November 30, 1989. Revenue Recognition The Authority recognizes revenue when power is delivered and billed to the customers. Cash and Cash Equivalents The Authority treats short-term temporary cash investments with original maturities when purchased, of three months or less as cash equivalents. Property, Plant, Equipment and Depreciation Property, plant and equipment are stated at original cost. The costs of additions and replacements are capitalized. Replacements of minor items of property are charged to expense as incurred. Costs of property retired are eliminated from accounts, likewise such costs plus removal expense less salvage are charged to accumulated depreciation. Advances for Hoover Uprating Program Proceeds from bonds payable were advanced by the Authority for uprating the Hoover Power Plant and are recorded as advances. Such advances, including debt issue costs, plus net interest expense incurred by the Authority are reimbursed in the form of credits on the monthly power bills rendered by the Western Area Power Administration of the Department of Energy ("Western"). These credits are issued over the 30-year life of the bonds. Substantially all advances, net interest expense and other related costs on the bonds are charged to the Uprating Program as amounts to be recovered from future credits.
25
26
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Investments The Authority has classified its marketable securities as held-to-maturity. Held-to-maturity securities represent those securities that the Authority has both the intent and ability to hold to maturity and are carried at amortized cost. Schedule C Energy Under its Electric Service Contract with Western, the Authority has preferential rights to excess energy ("Schedule C energy") generated at the Hoover Power Plant. The Authority buys Schedule C energy when available from Western during an operating year (October 1 to September 30). The Authority's financial statements are prepared on a fiscal year (July 1 to June 30) basis. When excess energy is available, the Authority bills its customers as Schedule C energy is delivered and receives payment during a given operating year, but Western does not bill for the cost of such Schedule C energy until the following operating year. An estimate of such amounts is accrued for at the end of the fiscal year. Operating and Non-Operating Revenues Operating revenues are revenues derived from the sale of power to customers or from other contractual agreements. Operating revenues include $6,300,000 received from Salt River Project for scheduling entity services. The revenue is the result of a recent agreement between the Authority and the Salt River Project which will yield $8,400,000 annual revenues to the Authority thereby reducing the overall revenue requirements to be paid by the Authority's customers through power rates. The agreement expires September 30, 2004 unless renewed. Non-operating revenues are from sources other than the sale of power to customers and primarily consist of income earned on investments. Application of Net Assets to Expenses Incurred The Authority applies unrestricted, undesignated net assets to expenses incurred. To the extent undesignated net assets are unavailable, unrestricted, designated net assets will be applied to expenses incurred. Customer Credits The Authority operates on a non-profit basis and reduces charges to its customers, through credits on power bills, for any revenues in excess of expenses after the close of the operating year. Likewise, the Authority bills it's customers for any deficit in revenues versus expenses incurred during the operating year. As of June 30, 2002, there were no accrued credits to be applied to customers' power bills based upon rates from Western's operating year ending September 30, 2002. Income Taxes The Authority is exempt from federal and Arizona state income taxes. Accordingly, no provision for income taxes has been recorded for the Authority in the accompanying financial statements.
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Geographic and Product Concentration The Authority's revenues are derived from the sale of electrical power and services to contracted customers in the state of Arizona. The Hoover Uprating Fund is used to purchase electric power solely from Western. The Authority's General Fund is used to purchase electric power from various providers. 2. FUND ACCOUNTING Hoover Uprating Fund The Hoover Power Plant Act of 1984 ("Hoover Act") authorized the U.S. government to increase the capacity i.e., "uprate," of existing generating equipment at the Hoover Dam Power Plant ("Uprating Program"). Instead of appropriating further federal funds for the Uprating Program, Congress implemented an advancement of funds procedure whereby prospective non-federal purchasers of the uprated Hoover capacity and associated energy contribute to the financing of the Uprating Program. The Uprating Program was determined to be complete in September 1995. The Authority financed a portion of the total Uprating Program by issuing bonds. The Hoover Uprating Fund accounts for advances by the Authority in connectio n with the Uprating Program. Effective June 1, 1987, the Authority executed new power contracts with Western and its customers which expire in 2017. The revenues and expenditures applicable to the sale and transmission of power and energy received by the Authority from Western under these contracts are accounted for in the Hoover Uprating Fund. APA General Fund The Authority's operations other than those applicable to the Hoover Uprating Fund are accounted for in the APA General Fund. The purchase of supplemental power and the sale and transmission of such power to the Authority's customers comprise the majority of this fund's activity. 3. CASH All cash balances maintained by the State of Arizona Treasurer are for pooled investment purposes. Statutes require the State Treasurer to invest these pooled funds in obligations of the U.S. government. All investments are carried at cost.
27
28
4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment of the APA General Fund at June 30, 2002 were as follows: 2002 Transmission and distribution plant General plant Total Less accumulated depreciation Property, plant and equipment, net JUNE 30, 2001 Property, plant and equipment: Transmission plant $ Distribution plant General plant - office Total property, plant and equipment Accumulated depreciation: Transmission plant Distribution plant General plant - office Total accumulated depreciation Property, plant and equipment, net $ ADDITIONS DISPOSALS
$
508,683 702,966 1,211,649 (1,030,150)
$
181,499
JUNE 30, 2002
289,049 219,634 683,599 1,192,282
$
1 9,3 67 19,367
$
-
$
289,049 21 9 , 6 3 4 70 2 , 9 6 6 1 ,211,649
(289,049) (170,596) (541,650) (1 , 0 0 1 , 2 9 5 ) 190,987 $
(8,697) (20,158) ( 28,855) (9,488) $
$
(289,049) (179,293) (561,808) (1,030,150) 181,499
The transmission and distribution plant is comprised of a substation and related equipment. Purchased power is delivered over transmission facilities owned by Western. Depreciation is provided on the straight-line composite method based on the estimated useful lives of the property items, which range from 5 to 44 years. 5. ADVANCES FOR HOOVER UPRATING PROGRAM Advances for the Hoover Uprating Program were reimbursed by Western through credits on the Authority's power bills in the amount of $4,623,123 for the year ended June 30, 2002. Credits were received for the upraters portion of principal and interest expense on the bonds and other costs associated with the Hoover Uprating Program. During the year ended June 30, 2002, principal amortization, interest expense and other related costs on the bonds issued to finance the Uprating Program exceeded interest income by $4,559,365. Any variation between credits received and costs incurred are reconciled the following year. 6. BONDS PAYABLE Bonds payable consists of the following: JUNE 30, 2001 Bond payable current $ Bond payable long-term 68,945,000 Total bonds payable $ 68,945,000 INCREASES $ $ REDUCTIONS $ $ TRANSFERS $ $ J U N E 30, 2002
1,450,000 $ 1,450,000 (1,450,000) 67,495,000 $ 68,945,000
6. BONDS PAYABLE (CONTINUED) In prior years, the Authority defeased various issues of bonds by purchasing U.S. government securities which were deposited in an irrevocable trust with an escrow agent to provide for future debt service until the call dates. As a result, those bonds are considered to be defeased and the liability for these bonds has been removed from the Hoover Uprating Fund. Accordingly, these trust account asset and related liabilities are not included in the Authority's financial statements. The remaining bonds, totaling $68,945,000, bear interest ranging from 4.9 percent to 5.4 percent, are due from 2003 through 2017, and are secured by the pledged property, as defined by the resolution, which includes the proceeds from the sale of the bonds, rights and interest in various contracts and revenues. The Authority amortizes the bond discount using the straight-line method, which approximates the effective interest method. Principal amounts due over the next five years ended June 30 and thereafter are as follow: $1,450,000 in 2003, $2,320,000 in 2004, $2,545,000 in 2005, $2,790,000 in 2006, $3,070,000 in 2007, $20,820,000 in 2008 through 2012, $29,160,000 in 2013 through 2017, and $6,790,000 in 2018. Crossover Refunding On September 12, 2001 the Authority issued $57,520,000 of Special Obligation Crossover Refunding Bonds. Proceeds from the sale of the bonds along with a fund's contribution by the Authority will be held in an escrow trust account invested in government securities until October 1, 2003 (the "Crossover Date") when, if certain conditions are met, the crossover refunding is scheduled to take place and $62,630,000 of the 1993 Series Power Resource Revenue Refunding Bonds maturing on and after October 1, 2005 will be defeased. If these conditions are not met, the assets in the escrow trust account will be used to retire the Special Obligation Crossover Bonds on the Crossover Date. The crossover is subject to the condition that on the Crossover Date balances held in the Debt Service Reserve Account at least equal the Debt Service Reserve Requirement and an appropriate legal opinion regarding the validity of the Authority's 2001 Series Power Resource Revenue Refunding Bonds has been received. The proceeds in the government securities escrow trust account, together with the income realized from investment of trust assets, serve as collateral for the Special Obligation Crossover Bonds and are paying the debt service on those bonds until the Crossover Date. The Special Obligation Crossover Bonds are payable solely from the amounts in the escrow trust account and are not payable from any other source. Because they are not payable from revenues derived by the Authority or secured by any assets held by the Authority, neither the Special Obligation Crossover Bonds nor the assets held in the escrow trust account are reflected on the Authority's statement of net assets at June 30, 2002. However, in conjunction with the issuance of the Crossover Bonds, the Authority deposited $2,694,576 with the crossover bond trustee; this amount is reflected as "Cash with fiscal agent" in the Authority's Statement of Net Assets at June 30, 2002. If the crossover occurs on the Crossover Date, the outstanding Special Obligation Crossover Bonds will be exchanged for 2001 Series Power Resource Revenue Refunding Bonds of the same principal amount, maturity date, and interest rate as the crossover bonds. The proceeds in the escrow trust account will be used to refund that portion of the 1993 Series Bonds maturing on and after October 1, 2005. The 2001 Series Bonds will be reflected as obligations on the Authority's books, and any gain or loss on extinguishment will be reflected in the Authority's records as of the Crossover Date. On and after the Crossover Date, the refunded portion of the 1993 Series Bonds will no longer be outstanding and will cease to be entitled to any lien on the revenues pledged to payment of those bonds. Instead, the revenue stream originally pledged to secure the refunded portion of the 1993 Series Bonds will "cross over" to pay debt service on the 2001 Series Bonds. The Crossover Bonds and 2001 Series Bonds bear interest at a rate of 5% and 5.25%, payable on April 1 and October 1 of each year, commencing April 1, 2004 and maturing in 2017.
29
30
7. INVESTMENTS HELD BY TRUSTEE As of June 30, 2002, investments are collateralized with securities held by the Authority's trustee. The amortized cost, which approximates fair value due to the short-term nature of the held-to-maturity investments, of the investment securities at June 30 is as follows: 2002 Repurchase agreement U.S. government securities Total held-to-maturity investments $ 7,146,663 2,568,910 $ 9,715,573
On September 19, 1996, the Authority entered into a repurchase and custody agreement with MBIA Investment Management Corporation ("IMC") wherein the Authority agreed to effect a series of repurchase transactions with IMC, in investments allowable under the bond resolution agreements and state law, with a fixed earnings rate of 6.95 percent. The securities are held in trust by Bank One of Arizona, N.A. If at any time the aggregate market value of all purchased securities is less than the amount required under the repurchase and custody agreement (calculated using a percentage of 104%), the Authority may require IMC to transfer additional securities so the aggregate market value of all securities will equal or exceed such requirement. 8. NET ASSETS Allocations of net assets for specified purposes are authorized and designated by the Commission, under provision of the Arizona Power Authority Act of 1944, as amended. The designated reserves shown on the accompanying statement of net assets are comprised of the following at June 30, 2002: 2002 Resource development Operations fund Power contracts System improvement and repairs Total 9. RETIREMENT PLAN The Authority contributes to the retirement plan described below. Benefits are established by state statute and generally provide retirement, death, long-term disability, survivor, and health insurance premium benefits. The Arizona State Retirement System (the "Plan" or "ASRS") administers a cost-sharing multiple-employer defined benefit pension plan that covers permanent, full-time employees of the Authority. The ASRS is governed by the Arizona State Retirement System Board according to the provisions of ARS Title 38, Chapter 5, Article 2. The ASRS issues a publicly available financial report that includes its financial statements and required supplementary information. A report may be obtained by writing or calling the plan at 1020 East Missouri Avenue, Phoenix, Arizona 85014, (602) 255-5575. The Plan was established by the State of Arizona to provide benefits for employees of the state and employees of participating political subdivisions and school districts. The Plan became effective on July 1, 1971. By actuarial computation, employee member and Authority contributions to the Plan were fixed at 2.49 percent (2.00 percent retirement and .49 percent long-term disability) of their compensation for the year ended June 30, 2002, with the contributions made through payroll deductions. Employee contributions vest immediately. Total contributions to the Plan for the year ended June 30, 2002 by the Authority's covered employees were $12,728. $ 3,500,000 200,000 100,000 200,000 $ 4,000,000
9. RETIREMENT PLAN (CONTINUED) Matching employer member contributions were actuarially determined and fixed at the same rate as employee member contributions for the year ended June 30, 2002. In the event the Plan's actuary determines that additional contributions are needed in order to amortize an unfunded accrued liability, every employer member will be required to contribute the revised contribution percentage which is established by the Arizona State Legislature. All full-time employees of the Authority are required to become members of the Plan. The Authority's total payroll for employees covered by this Plan for the years ended June 30, 2002 was $521,521. Contributions to the Plan by the Authority for its covered employees vest over five years. All required employer contributions are made to the Plan by the end of each month. 10. ADDITIONAL BENEFITS In addition to the pension benefits described above, ASRS offers health care benefits to retired and disabled members that are no longer eligible for health care benefits through their former member employer's group health plan. Retired is defined as actively receiving an annuity benefit and disabled is defined as receiving a long-term disability ("LTD") benefit through the LTD program administered by ASRS. The following chart illustrates the maximum amount of the monthly available benefit for eligible members and their dependents: MEMBER Years of Credited Service 5.0 - 5.9 6.0 - 6.9 7.0 - 7.9 8.0 - 8.9 9.0 - 9.9 10.0+ Percent of Premium Benefit 50% 60% 70% 80% 90% 10 0 % Not Medicare Eligible $ 75.00 90.00 105.00 120.00 135.00 150.00 Medicare Eligible $ 50.00 60.00 70.00 80.00 90.00 100.00 DEPENDENT(S) Not Medicare Eligible $ 130.00 156.00 182.00 208.00 234.00 260.00 Medicare Eligible $ 85.00 102.00 119.00 136.00 153.00 170.00
31
11. PURCHASED POWER, SALES AND TRANSMISSION COMMITMENTS The Authority is party to Firm Electric Service and Transmission Service Contracts with terms expiring September 30, 2017. This requires the Authority to pay approximately 19 percent of Western's revenue requirements each operating year until the contract expires. During the year ended June 30, 2002, the Authority paid $15,344,365 for Purchased Power under this contract. The Authority is obligated to pay these costs under the contract even in the unlikely event that no power is supplied. During the year ended June 30, 2002, the Authority paid $5,204,148 for related transmission costs to Western. The Authority has sales contracts with all customers. Under these contracts, customers are obligated to pay for their percentage allocation if any Hoover power is delivered or made available for delivery. These sales contracts expire September 30, 2017, but some can be terminated by the Authority on June 1, 2007 or thereafter. The Authority also has contracts with Salt River Project for purchase and transmission of power to the Authority's customers. Under the transmission contract, the Authority must pay an annual transmission fee of $63,898 until September 30, 2017.
32
SUPPLEMENTAL SCHEDULE STATEMENT OF OPERATIONS OF THE HOOVER UPRATING
JUNE 30, 2002 REVENUE FUND OPERATING ACCOUNT
MONTHLY PAYMENT RESERVE ACCOUNT
OPERATING REVENUES Operating expenses: Purchased power Western credits Amortization of Hoover Uprating Program costs Transmission and distribution Administrative and general Other Total operating expenses Operating income (loss) Other income (deductions): Interest expense Deferred interest expenses Interest income Other, net Total other income (deductions) Change in net assets
$ 22,256,521
$
-
$
-
-
15,344,365 (4,623,123) 4,623,123
-
-
5,204,148 1,098,598 18,142
-
22,256,521
21,665,253 (21,665,253)
-
76,296 2,323
-
25,180 -
$ 22,256,521
78,619 $ (21,586,634) $
25,180 25,180
33
FUND - INDIVIDUAL FUNDS AND ACCOUNTS
CONSTRUCTION FUND
DEBT SERVICE ACCOUNT
DEBT SERVICE RESERVE ACCOUNT
RESOURCE DEVELOPMENT FUND
GENERAL RESERVES FUND
TOTAL
$
-
$
-
$
-
$
-
$
-
$
22,256,521
-
-
-
-
-
15,344,365 (4,623,123) 4,623,123
-
-
-
-
-
5,204,148 1,098,598 18,142
-
-
-
-
-
21,665,253 591,268
(82,842) -
(3,646,324) 2,977,031 34,471 -
496,131 -
-
-
(3,729,166) 2 ,97 7 ,031 632,078 2,323
(82,842) $ (82,842)
(634,822) $ (634,822) $
496,131 496,131 $
$
$
(117,734) 473,534
NOTE: The above supplemental schedule includes all funds and accounts, as defined by the APA Power Resource Revenue Bond Resolution.
34
SUPPLEMENTAL SCHEDULE - STATEMENT OF INCOME AS DEFINED UNDER THE POWER RESOURCE REVENUE
JUNE 30, 2002 REVENUE FUND CHANGE IN NET ASSETS Adjustments to net income (loss) under the power resource revenue bond resolution: Changes in assets and liabilities: Accounts receivable Interest receivable Prepaid purchased power Accounts payable Power contracts payable Other adjustments: Amortization of premiums and discounts on investments Cash from trustee funds Amortization of discount on bonds payable Change in advances for Hoover Uprating Program Income (loss) as defined under the power resource revenue bond resolution June 30, 2002 cash and investment balance $ 22,256,521 OPERATING ACCOUNT $ (21,586,634)
MONTHLY PAYMENT RESERVE ACCOUNT $ 25,180
667,262 -
4,268 6,700 585,614 32,931 (591,413)
23,938 -
-
-
-
-
-
-
$ 22,923,783
$ (21,548,534)
$
49,118
$
-
$
2,532,576
$
-
(LOSS) OF THE HOOVER UPRATING FUND BOND RESOLUTION
35
CONSTRUCTION FUND $ (82,842)
DEBT SERVICE ACCOUNT $ (634,822)
DEBT SERVICE RESERVE ACCOUNT $ 496,131
POWER RESOURCE GENERAL RESERVES DEVELOPMENT FUND FUND $ $ $
TOTAL 473,534
-
7,144 -
-
-
-
671,530 37,782 585,614 32,931 (591,413)
82,842
3,909 (1,383,614) -
3,167 (405,659) -
-
-
7,076 (1,789,273) 82,842
1,115,428
-
-
-
-
1,115,428
$
1,115,428
$ (2,007,383)
$
93,639
$
-
$
-
$
626,051
$
-
$ 2,316,931
$ 7,398,642
$
-
$
-
$ 12,248,149
NOTE: The above supplemental schedule includes all funds and accounts, as defined by the APA Power Resource Revenue Bond Resolution.
36
DEBT SERVICE COVERAGE RATIO OF THE HOOVER UPRATING FUND
YEAR ENDED JUNE 30, 2002 (UNAUDITED)
NET INCOME Add: Interest Expense (1) Amortization (1) Depreciation (1) Western Credits Credits to Customers for Prior Year Total Additions Deduct: Deferred Interest Expense Total Deductions Income available for debt service Debt service (2) Debt service coverage ratio
(1)
$
473,534 3,646,3241 82,8421 18,1421 4,623,1231 419,818 8,790,2481
(2,977,031) (2,977,031) $ 6,286,7511 $ 4,733,8241 1.331
Interest expense, depreciation expense and amortization of Uprating Costs are not expenses under the Bond Resolution. Debt Service is the total of Principal and Interest Expense accrued between July 1, 2001 and June 30, 2002.
(2)
ARIZONA POWER AUTHORITY
1 8 1 0 WEST ADAMS STREET P H O E N I X , ARIZONA 85007 ( 6 0 2 ) 542-4263 FA X (602) 253-7970
P H OT O S COURTESY OF THE BUREAU OF RECLAMATION AND WESTERN AREA POWER ADMINISTRATION